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Achieving Sustainable Prosperity.Benchmarking the Competitiveness of Newfoundland and Labrador

REPORT APRIL 2015

Palladini, Jacqueline. Achieving Sustainable Prosperity: Benchmarking the Competitiveness of Newfoundland and Labrador. ottawa: The Conference Board of Canada, 2015.

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Preface

Newfoundland and Labrador has experienced unprecedented economic and employment growth since 1997 due to the development of its offshore oil and its nickel and iron ore mining industries. But there are many areas where the province’s competitiveness has lagged that of its closest competitors. Looking ahead, the province will face additional economic and fiscal challenges with a maturing oil sector and a rapidly aging population.

The purpose of this report is to identify areas where Newfoundland and Labrador can improve its long-term competitive business environment. This report identifies the areas where Newfoundland and Labrador has underperformed relative to its closest competitors using a benchmarking analysis methodology. The report then offers potential policy areas where the province could improve its competitive position and mitigate some of the challenges it will face in the not-too-distant future.

Achieving Sustainable Prosperity: Benchmarking the Competitiveness of Newfoundland and Labrador Jacqueline Palladini

For the exclusive use of Jim Organ, [email protected], Heavy Civil Association of Newfoundland and Labrador.

CONTENTS

i EXECUTIVE SUMMARY

Chapter 1 1 Introduction

Chapter 2 5 Competitiveness Framework 6 What Is “Competitiveness”? 8 Indicator Selection 11 Jurisdiction Selection 14 Report-Card-Style Ranking and Policy Recommendations

Chapter 3 16 Benchmarking Results 17 The Big Picture 26 Innovation 30 Investment 39 Human Capital 60 Business and Policy Environment

Chapter 4 71 Challenges and opportunities 72 Policies to Boost Innovation 79 Policies to Support and Expand Investment 85 Policies to Strengthen the Labour Force 97 Policies for a More Competitive and Sustainable Fiscal Environment

Chapter 5 106 Conclusion

Appendix A 109 Bibliography

Appendix B 118 Jurisdiction Selection methodology

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AcknowledgementsThe author would like to thank Dr. L. Wade Locke, professor of economics at Memorial University, for his thoughtful comments in reviewing an earlier draft of the report. Thanks also to the Newfoundland and Labrador Employers’ Council (NLEC) for examining the findings and in particular to Richard Alexander, Executive Director, and Jaclyn Sullivan, Manager of Public Relations and Strategy, for their insights and comments in reviewing earlier draft versions of the report. Thanks also to The Conference Board of Canada internal reviewer, Glen Hodgson, as well as Pedro Antunes and Marie-Christine Bernard for their insights and guidance in producing this research. The author would like to thank Sheila Rao and Decky Kipuka Kabongi for gathering much of the data used in this report. Lastly, thank you to Justin Cooke, Todd Crawford, and Daniel Fields for contributing their knowledge of the energy sector and public finances in Newfoundland and Labrador.

Funding for this research was provided by the Newfoundland and Labrador Employers’ Council. The NLEC does not necessarily endorse the research conclusions of this report.


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• Newfoundland and Labrador has experienced unprecedented economic, productivity, and fiscal growth since 1997 due to the development of the offshore oil and metal mining sectors.

• But this growth was driven by the development of finite resources. The province needs to foster a competitive policy environment to maintain its high level of productivity, and to sustain economic prosperity for future generations.

• This report identifies the province’s current competitive strengths and weaknesses relative to its peers by benchmarking several performance indicators against its direct competitors.

• The results of the benchmarking analysis are used to identify broad policy areas where the province can enhance its competitive business environment. These policies cover four areas of competitiveness: innovation, investment, human capital, and the business and policy environment.

EXECUTIVE SUMMARY

Achieving Sustainable Prosperity: Benchmarking the Competitiveness of Newfoundland and Labrador

At a Glance


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AChIeVING SUSTAINABLe PRoSPeRITyBenchmarking the Competitiveness of Newfoundland and Labrador

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Newfoundland and Labrador has experienced unprecedented economic growth since 1997 due to a natural resources boom. The development of the oil extraction industry and the strength of metal mining have brought with them economic, employment, and fiscal benefits. Annual inward greenfield foreign direct investment averaged $750 million over the past five years.1 Investment in, and development of, highly productive industries pushed labour productivity to the highest levels in the country, and the provincial government managed to pay down public debt and balance its books for a period of time.

Despite these important gains, there are concerns about the breadth of

economic prosperity—in areas of the economy outside the mining, oil

and gas sector—and also about the future sustainability of this prosperity

that currently hinges largely on finite resources: oil, nickel, and iron ore.

The purpose of this report is to identify areas where Newfoundland and

Labrador can improve its long-term competitive environment to broaden

its areas of prosperity and to sustain the province for future generations.

Using a benchmarking analysis methodology, this report identifies the

areas in which Newfoundland and Labrador has underperformed (or

performed well) relative to its closest competitors. The results of the

benchmarking analysis are then used to identify broad policy areas

where the province can enhance its competitive position in order to take

on some of the challenges it will face in the not-too-distant future.

1 fDi markets.com, Database.


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Executive Summary | The Conference Board of Canada

Benchmarking Analysis and Results

The framework for the benchmarking analysis is based on four

foundational themes that together determine business competitiveness:

innovation, investment, human capital, and the business and policy

environment. (See exhibit 1.) Newfoundland and Labrador’s performance

was benchmarked against nine of its direct competitors (see Table 1) on

competitiveness indicators grouped within these four themes. For each

of the 32 indicators benchmarked, a report-card-style letter grade was

assigned to each jurisdiction based on relative performance.

exhibit 1Framework for Determinants of Competitiveness

Business andpolicy environments

Global forces

Innovation InvestmentHumancapital

Source: The Conference Board of Canada.


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Table 1Newfoundland and Labrador’s Comparator Jurisdictions

International U.S. states* Canadian provinces

Norway Texas Alberta

United Kingdom North Dakota Saskatchewan

quebec

Nova Scotia

New Brunswick

*For indicators where state data were not available, U.S. national variables were used. Source: The Conference Board of Canada.

The results of the benchmarking analysis revealed that Newfoundland

and Labrador’s “big picture” indicators of GDP and labour productivity

levels rank in the middle compared with its competitors. however, growth

of these indicators over the past five years has been slow, indicating that

overall competitiveness is slipping.

Newfoundland and Labrador performs poorly on all innovation indicators,

which include research and development spending and patent

applications. Investment indicators showed generally mixed performance,

with Newfoundland and Labrador being very successful at attracting

foreign direct investment but investing relatively little in infrastructure.

In terms of human capital, the province ranks below average on the

education and skills indicators and its labour market underperforms

relative to its competitors.

The benchmarking exercise revealed high published provincial corporate

income tax rates in Newfoundland and Labrador with a prevalence of tax

measures targeting various sectors and areas of the economy. When the

tax credits in this complex system are taken into account, the effective

tax rates on businesses are actually low. however, the multitude of tax

credits contributes to one of the most distortive tax systems in Canada.

Targeted sector-specific tax relief benefits less productive sectors of the


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economy, yields high compliance costs for businesses, and results in

high monitoring costs for governments. other business costs for items

such as payroll, transportation, and utilities are high.

The fiscal health of the province shows middle-of-the-pack performance

in the net debt indicator. The province managed to pay down its

debt in the mid-2000s, but this has since crept up again and could

ramp up quickly given the impact of the recent slide in oil prices on

royalty revenues.

Policy Challenges and Opportunities

The benchmarking results revealed a picture of Newfoundland and

Labrador’s competitiveness that has come a long way in the last

15 years. however, there are many areas within the competitive building

blocks—innovation, investment, human capital, and business policy

environment—where individuals, businesses, and the government can

make improvements that will support the province’s competitive position.

(See “Summary of Policy Recommendations.”)

Innovation is a key factor in the province’s future prosperity. Increased

competition leads to new ideas, improved business organization, and

innovative production procedures. Lowering trade barriers can expand

opportunities in new markets. Furthermore, the links between post-

secondary institutions and companies can be strengthened to boost

innovation in the economy.

Investing in new technologies and machinery can increase production

and productivity while managing labour costs. Taxes on private capital

need to become more efficient and less distortive to encourage this

investment. Local businesses face hundreds of “boutique” tax credits

that increase compliance time and costs, and lead to inefficient overall

allocation of limited investment funds. Productivity can also be improved

by increasing investment in public infrastructure.

The benchmarking results revealed a picture of Newfoundland and Labrador’s competitiveness that has come a long way in the last 15 years.


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There are labour skill gaps in the province that will only worsen as the

population ages rapidly. Policies to increase skills, such as boosting

apprenticeship training and better aligning education with labour market

needs, would mitigate some of the issues. Attracting more interprovincial

and international immigration would strengthen the labour market, while

engaging older workers and under-represented groups would also help

cushion the impacts of aging.

The current fiscal situation is not sustainable. expenditures have

outpaced revenues through most of recent history and net debt is

increasing. The province managed to balance its books during the

mid-2000s because of a sharp rise in royalty revenues. But the surplus

situation was short-lived as expenditures continued to rise. expenditures

have expanded much faster than revenues, excluding royalties. In fact,

day-to-day programming such as health and education is being funded

largely by royalty revenues, exposing these programs to fluctuating

commodity prices. (See Chart 1.) As a result of this rapid increase in

expenditures, net debt is growing. This has been during a time of relative

economic prosperity when the debt should have been reduced. Program

spending needs to be prioritized, with a focus on reining in the public

administration sector that has ballooned in recent years. moreover, a

portion of non-renewable resource revenues could be set aside in a

sovereign wealth fund to ensure that future generations can benefit from

the current resource extraction and to ensure that program spending is

not subject to commodity price swings.

In summary, Newfoundland and Labrador has experienced

unprecedented economic growth that has brought many economic,

employment, and fiscal benefits. Despite these gains, there are several

current and future areas that will present major challenges to individuals,

companies, and governments. oil brought an economic boom that will

eventually come to an end. Now is the time to take on the challenges so

a competitive and prosperous environment will continue long after the

resource is exhausted.

There are several current and future areas that will present major challenges to individuals, companies, and governments.


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Summary of Policy Recommendations to Enhance Newfoundland and Labrador’s Business Competitiveness

Several policies would help meet the upcoming challenges of aging and

resources. This report’s recommendations include the following:

Innovation• strengthen links between higher education institutions and the private sector;

• increase competition by lowering trade barriers and through

government procurement.

Investment• create equitable and efficient tax systems for capital;

• increase investment in public infrastructure.

Chart 1Province Depends on Oil Royalties to Balance Its Books($ billions)

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ExpendituresOil royalties Revenues, excluding royalties

e = estimate f = forecast Sources: Newfoundland and Labrador Department of Finance; The Conference Board of Canada.


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Human capital• boost immigration and corresponding recognition of credentials;

• increase education levels and match skills training with labour force needs;

• retain and engage older workers and under-represented groups.

Fiscal policies• reduce government programs’ reliance on funding coming from annual

oil revenues;

• keep net debt in check by reducing spending, especially in public administration;

• create a sovereign wealth fund so future programming can rely more on interest

and less on oil prices.



• Newfoundland and Labrador has experienced unprecedented economic, productivity, and fiscal growth since 1997 due to the development of the offshore oil and metal mining sectors.

• The province needs to implement a competitive policy environment to maintain its high level of productivity and economic prosperity.

• This report identifies the province’s competitive strengths and weaknesses relative to its peers by benchmarking several performance indicators against its direct competitors.

• The results of the benchmarking analysis are used to identify broad policy areas for the province to enhance its competitive business environment.

CHAPTER 1

Introduction

Chapter Summary


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After many years of economic stagnation, Newfoundland and Labrador experienced unprecedented economic growth from the late 1990s to the mid-2000s due to a resources boom—particularly in the mining and oil and gas industries. Newfoundland and Labrador’s real gross domestic product (GDP) grew substantially faster (5 per cent) than the national average (3.3 per cent) over the 10-year period 1997–2007 (expressed in annual average compound growth rates). Large resource projects and the development and production of oil at several offshore platforms during this time also led to impressive growth in labour productivity in the province. Business sector labour productivity—the amount of output per hour worked—expanded at a pace more than three times the national average.1 By 2007, the provincial economy’s overall labour productivity levels were the highest in the country.2

Because the economic and productivity gains were driven by the

development of oil, a finite and non-renewable resource, concerns have

been raised about both the province’s breadth of economic prosperity

and its sustainability for future generations. The province has already

shown signs that its prosperity has begun to languish. Real GDP peaked

in 2007, coinciding with a peak in oil extraction. While there is no doubt

the economy is operating at very high levels, real GDP experienced no

1 Statistics Canada, CANSIm table 383-0011.



Chapter 1 | The Conference Board of Canada


growth from 2007 to 2013 (a period that includes the 2008–09 global

financial crisis). meanwhile, the national economy grew 8.3 per cent over

the same period.

Another concern is waning labour productivity. While Newfoundland

and Labrador was able to maintain its first-place standing as the most

productive economy in the country for several years, Alberta has

overtaken Newfoundland and Labrador for top spot since 2011. Indeed,

Newfoundland and Labrador experienced the largest productivity

declines in the country over the five years since 2007, though

productivity levels still remain high. (See Chart 2.)

The challenge ahead for Newfoundland and Labrador is twofold:

first, maximize the labour and income benefits from the current boom;

and second, ensure the sustainability of this current prosperity for

future generations. Achieving these goals requires a policy environment

that encourages competitiveness and productivity. The province

has derived considerable benefit over recent history from surging

investment in the oil extraction industry, but the province will not be

able to rely as heavily on this one industry to drive economic growth

Chart 2Newfoundland and Labrador’s High Productivity Has Declined(real value-added output per hour; chained 2007 $)

2007 08 09 10 11 12 13

404550556065707580

Canada Newfoundland and Labrador Alberta

Sources: Statistics Canada; The Conference Board of Canada.


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over the longer term. While we expect several new energy basins to be

developed in the future, these may not fully offset the declines expected

at existing maturing fields. Thus, while investment will remain robust, the

contribution of the oil extraction industry to the economy will wane as

exports fall in line with production.3 moreover, the province’s population

is the oldest in Canada and this will exacerbate current labour skills gaps

over time. Fostering a highly competitive business environment will help

mitigate the negative effects of these issues and allow the province to

continue attracting investment and enhancing the success and wealth of

its industry and citizens.

This purpose of this report is to identify areas where Newfoundland

and Labrador can improve its competitive environment. Chapter 2

contains a description of the report’s methodology. Then, in Chapter 3,

Newfoundland and Labrador’s competitiveness is benchmarked

against jurisdictions that are direct competitors in international and

domestic markets. This benchmarking identifies the areas in which

the province performs well and the areas in which it could improve its

competitiveness. Chapter 4 provides broad policy recommendations

to improve Newfoundland and Labrador’s competitiveness against its

peers. Chapter 5 concludes.

3 Cooke, “Newfoundland and Labrador.”

While investment will remain robust, the contribution of the oil extraction industry to the economy will wane as exports fall in line with production.



• Improving labour productivity is at the heart of improving competitiveness and therefore is the main “big picture” indicator of competitiveness.

• The benchmarking indicators reflect the four foundational themes that contribute to higher labour productivity—innovation, investment, human capital, and the business and policy environment—themes that together determine a region’s business competitiveness.

• The comparator jurisdictions chosen are Newfoundland and Labrador’s competitors and have similar business operating environments.

• The areas where the province underperforms in the benchmarking analysis are the policy focus areas of this report. Policy recommendations are developed based on the findings from the benchmarking analysis and from a literature review of current competitive policy research.

CHAPTER 2

Competitiveness Framework

Chapter Summary


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What Is “Competitiveness”?

The framework for this analysis focuses on the essential building blocks of competitiveness and its sustainability—labour productivity, innovation, investment, and human capital—all operating within an enabling business environment. The concept of “competitiveness” and the methodology used to benchmark the competitiveness of comparator regions are guided by the definitions developed by the Organisation for Economic Co-operation and Development (OECD) and the World Economic Forum (WEF).

The oeCD defines competitiveness as “the degree to which a country

can, under free and fair market conditions, produce goods and services

which meet the test of international markets, while simultaneously

maintaining and expanding the real incomes of its people over the

long term.”1 Although targeted toward countries, this definition is also

appropriate for a provincial-level analysis. In today’s global marketplace,

the ability to meet the test of international markets is an increasingly

important factor affecting economies, whether national or provincial.

1 oeCD, Technology and the Economy.




The WeF defines competitiveness as “the set of institutions, policies,

and factors that determine the level of productivity of a country.”2

Ultimately, both definitions identify improving productivity as being at

the heart of improving competitiveness. This link has been made by

academics as well:

“ True competitiveness is measured by productivity. Productivity

allows a nation to support high wages, attractive returns to capital,

a strong currency—and with them, a high standard of living. What

matters most is not exports per se or whether firms are domestic

or foreign-owned, but the nature and productivity of the business

activities taking place in a particular country.3

Dr. michael Porter

Increasing labour productivity does not mean working harder, as many

assume, and it certainly does not mean working longer hours. Rather,

increasing labour productivity means generating more output in any

given hour worked by making better use of machinery and equipment

(investing in capital); by changing the organizational structure or

developing new methods of production or new products (innovation);

or by having a workforce with appropriate skills and knowledge

(human capital).

The Conference Board has developed a framework to illustrate the key

determinants of productivity. (See exhibit 2.) There are three sets of

determinants. The first set comprises firm-specific factors that relate to

innovation, investment, and human capital in a particular organization.

The second set consists of the business and policy environments in

which organizations operate. The third set relates to dynamics in the

global economy—such as changes in global commodity prices—over

which individual regions or organizations have little influence.

2 Schwab, The Global Competitiveness Report 2014–15.

3 Porter, What Is Competitiveness?


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Indicator Selection

The indicators chosen all fit into the framework described in

exhibit 2. The following qualities were considered when choosing

the indicators: they must be theoretically valid, empirically reliable,

comparable across regions, and relevant to the overall goal of

benchmarking competitiveness.

Typically, the indicators measure outcomes—what has actually been

achieved—rather than the inputs used to produce the outcome or

policy responses to those outcomes. To measure education quality, for

example, student skills in math and reading are chosen as indicators

exhibit 2Framework for Determinants of Competitiveness

Business andpolicy environments

Global forces

Innovation InvestmentHumancapital





rather than government expenditures on education. We focus on

what has actually been achieved rather than on how much has been

invested. This approach enabled us to assess where a region is

reaping a good return on its investments and where new strategies

are needed. however, using outcomes rather than input indicators is

more challenging at the provincial level than at the national level, due

to limitations in data availability. Therefore, proxy input indicators were

used in some instances. For example, the amount of research and

development spending by businesses and government was used as

indicators of innovation performance.

In addition, The Conference Board of Canada uses only those indicators

where it is clear whether movement of the indicator value in a given

direction is considered desirable or undesirable. For example, a higher

value is always better for income per capita. however, with an indicator

that measures wages and salaries, for example, the distinction is

not always clear. While higher wages and salaries can attract high-

performing workers to the province, they may be undesirable for

businesses in the province because they put pressure on profitability

in international markets. Therefore, such an indicator would not be

included in the benchmarking exercise. That said, movement of the

chosen indicators in a particular direction is not necessarily indicative of

better performance. For example, the presence of greater research and

development (R&D) investment may lead to better innovation outcomes,

but only if smart investments are made and the funds are actually being

used efficiently. Increased spending does not necessarily guarantee

better outcomes.

We saw from exhibit 2 that there are several sets of determinants of

productivity that need to be benchmarked. exhibit 3 shows the indicators

that were chosen for each set of determinants. (“Global forces” are

not benchmarked.) The final list of indicators was chosen based on

consultations with project investors and on data availability. A total of

32 competitiveness indicators are benchmarked. Because comparable

data were not available for all regions, some indicators were ranked for

The indicators measure outcomes—what has actually been achieved—rather than the inputs used to produce the outcome.


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just the provinces. Some indicators emphasize a gap in performance

(differences in levels among regions); others emphasize progress toward

closing a gap (differences in growth rates among countries).

exhibit 3Competitiveness Indicators

Business and policy environment• Taxes levied on businesses• Payroll taxes• Marginal tax on capital• Provincial corporate taxes (provincial)• Transportation costs• Utility costs• Net provincial debt (provincial)

The big picture• GDP per capita level• GDP per capita growth• Labour productivity level• Labour productivity growth

Innovation• Business expenditures on R&D• Public expenditures on R&D• Patent applications per capita

Investment• Machinery and equipment• Non-residential structures• Inward foreign direct investment• Investment by government (provincial)• Average age of infrastructure (provincial)

Human capital• University completion• College completion• Science, math, engineering graduates• Apprenticeship completions (provincial)• Student skills (various)• Adult skills (various)• Labour force participation rate• Employment growth• Unemployment• Unit labour costs• Days not worked due to strikes• Population 65+ by 2025• Net migration





Four indicators—gross domestic product (GDP) per capita levels and

per capita growth and labour productivity levels and labour productivity

growth—present the “big picture” on economic and competitive

performance. The remaining indicators are considered drivers of

competitiveness and are grouped into four categories: innovation,

investment, human capital, and the business and policy environment.

Jurisdiction Selection

The selection of jurisdictions for comparison is important to properly

benchmark Newfoundland and Labrador’s competitiveness. These

jurisdictions were chosen for their similarities in economic structure,

export markets, and business environment in order to gain insight into

how the province performs against its competitors.

The chosen jurisdictions are direct competitors of the province and

face similar business challenges. Choosing jurisdictions that are direct

export competitors eliminates jurisdictions that have different export

markets and exported products—Prince edward Island, for example.

Selecting jurisdictions that face similar business challenges rules out

many oil exporting countries in the middle east, for example, because

those countries’ operating environments differ too much from that of

Newfoundland and Labrador even though they export oil to the same

regions as does Newfoundland and Labrador.

export competitors with common export destinations and a similar trade

mix to Newfoundland and Labrador are identified using internationally

available trade data. In addition to these two criteria, the industrial

structure, rural population dispersion, and the size of the economy

were considered. For a detailed description of the jurisdiction selection

methodology, please see Appendix B.

Comparator jurisdictions were chosen for their similarities in economic structure, export markets, and business environment.


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The list of comparator regions was finalized after consultations with

representatives from the Newfoundland and Labrador employers’

Council. The list includes two countries, two U.S. states, and five

Canadian provinces:

NorwayThe trade mix of Norway is very similar to that of Newfoundland and

Labrador, with a prominence in the oil sector—offshore oil in particular.

According to the World Trade organization, fuel and mining products

make upward of 75 per cent of Norway’s exports. The top import from

Norway in both the U.S. and Canada is crude oil. This oil-rich country

also faces some similar business challenges such as having to transport

goods by ship to reach markets.

United KingdomThe United Kingdom is one of the most diversified economies on the list

and includes some offshore oil exports. The U.K. exports oil to many of

the same U.S. states as Newfoundland and Labrador, making it a direct

competitor. It also has a history of iron mining and still has large reserves

of iron ore, although its mining industry is more mature and mining

activities have decreased substantially.

TexasTexas has a large established oil industry and exports oil to many of the

same countries as Newfoundland and Labrador, including China, the

U.K., Netherlands, France, Japan, and Spain. In the early 1980s, oil was

the backbone of the Texan economy, as is the case in Newfoundland

and Labrador today. however, Texas diversified its economy in the 1990s

and is now far less sensitive to volatility in oil prices than it once was.

Texas may be able to offer some best practices in this regard.4

4 There are limited U.S. state data available for many of the indicators benchmarked. In cases where U.S. data are not available at the state level, a U.S. national variable was substituted in the benchmarking calculations.




North DakotaNorth Dakota is a major producer of oil and is experiencing a modern

oil boom thanks to the discovery of the Parshall oil Field in 2006. Since

it is a fairly recent boom, it has many similarities to Newfoundland and

Labrador. The rest of North Dakota’s economy is largely agriculturally

based. There is also a large rural population, with 40 per cent of

the population living in rural areas compared with 41 per cent in

Newfoundland and Labrador.5

AlbertaAlberta is the largest producer and exporter of oil in Canada and, as it

exports oil to many of the same places as Newfoundland and Labrador,

it is a competitor. While Alberta’s mineral fuel production is much larger

than Newfoundland and Labrador’s, petroleum products make up a

smaller proportion of its total export mix because Alberta’s economy is

more diversified. The provinces face some similar business challenges,

including shortages of skilled labour.

SaskatchewanSaskatchewan is Canada’s second-largest exporter of oil, which

accounts for 35 per cent of the province’s total exports. however,

Saskatchewan exports to different markets than Newfoundland and

Labrador and, as such, is not currently a direct competitor to the same

extent as the other comparator jurisdictions selected. Although it does

not produce iron ore, the mining of uranium, potash, and other minerals

is extremely prominent in Saskatchewan, making this province a good

comparator for benchmarking. Also, there is a relatively high proportion

of the population (33 per cent) living in rural areas.

5 There are limited U.S. state data available for many of the indicators benchmarked. In cases where U.S. data are not available at the state level, a U.S. national variable was substituted in the benchmarking calculations.

North Dakota is experiencing a modern oil boom and has many similarities to Newfoundland and Labrador.


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Quebecquebec shares a border with Labrador and exports many of the same

products: iron ore, refined oil products, newsprint, and lumber. eight of

Newfoundland and Labrador’s top 10 international export destinations

are also in quebec’s top 10 export destinations, making quebec a direct

competitor. It is the only other province that is a large producer of iron

ore. quebec is also facing the challenge of an aging population. By

2025, the proportion of the provincial population that is 65 and older will

be higher than the national average in both provinces.

Nova ScotiaNova Scotia’s industrial structure is different from Newfoundland and

Labrador’s. however, Nova Scotia exports many of the same goods,

including seafood, fish, lumber, and newsprint products. moreover, four

out of Nova Scotia’s top five international export destinations are also

listed in Newfoundland and Labrador’s top five export destinations. This

province has many other aspects that make it comparable, such as

similar rates of urbanization and an older population.

New Brunswickoil-related products make up 60 per cent of New Brunswick’s exports,

making it a relevant comparator region. There are many other export

products such as crustaceans, lumber, and metals that the province has

in common with Newfoundland and Labrador, and the two provinces

share about half of the same top export destinations. only 53 per cent

of New Brunswick’s population is urbanized and the province is also

experiencing population aging.

Report-Card-Style Ranking and Policy Recommendations

We adopt a report-card-style A-B-C-D ranking for this report, and each

region was graded on each indicator. Grade levels are assigned to each

indicator using the following method:




For each indicator, the difference between the top- and bottom-

performing regions was calculated, and this figure was divided by four. A

region received an “A” grade on a given indicator if its score was in the

top quartile, a “B” if its score was in the second quartile, a “C” if its score

was in the third quartile, and a “D” if its score was in the bottom quartile.

For example, suppose that the top performer on real GDP growth is

Saskatchewan at 3.5 per cent and the bottom performer is the U.K.

with a rate of 1.5 per cent. The four ranges for grades using the above

method are as follows:

• A: 3.0–3.5

• B: 2.5–2.99

• C: 2.0–2.49

• D: 1.5–1.99

each jurisdiction is assigned a letter grade, determined by the range into

which the jurisdiction’s GDP growth falls. This methodology ensures that

those regions awarded an “A” grade are truly the best. one weakness

of the A-B-C-D ranking methodology, however, is that very small

differences in indicator values between the highest- and lowest-ranking

regions result in the regions with the lowest values being given a “D”

grade, even though their score may be close to the leader’s score. As

well, extreme outliers may skew the results. For example, an extreme

top performer could be awarded an “A” while everyone else gets a

“D,” including the second-best performer. Because of these limitations

in certain cases, the overall ranking of the regions is an important

consideration as well and should be analyzed along with the letter grade.

The benchmarking exercise yields results that highlight Newfoundland

and Labrador’s competitive performance outcomes. Areas where the

province falls short of its competitor jurisdictions will help identify policy

areas that may need improvement. Broad policy recommendations are

offered that could help improve these competitive outcomes.

Areas where Newfoundland and Labrador falls short of its competitor jurisdictions will help identify policy areas that may need improvement.


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• Despite major economic and productivity gains over the 1997–2007 period, Newfoundland and Labrador’s economy faltered more recently in the “big picture” indicators of GDP and labour productivity.

• Newfoundland and Labrador performs poorly on all innovation indicators.

• Investment indicators showed generally mixed performance despite large capital investments in the province since the beginning of the oil boom in 1997.

• The province ranks below average on the education and skills indicators and its labour market underperforms its competitors.

• While published corporate tax rates are high in the province, the tax system is rife with tax credits giving preferential treatment to certain sectors. When the tax credits are taken into account, the effective tax rates are low. however, other business costs such as payroll, transportation, and utilities are high.

• The fiscal health of the province improved but indicators still show middle-of-the-pack performance in the net debt indicator.

CHAPTER 3

Benchmarking Results

Chapter Summary




Benchmarking is a useful public policy tool that provides a reality check by assessing performance—in this case, the competitive performance of Newfoundland and Labrador relative to its direct competitors. It allows us to gain perspective on the province’s current performance and helps to identify policy priorities. To envision where you want to go, you must first determine where you are.

Benchmarking against other regions helps to identify competitive

performance gaps. There is much to be learned from developments in

other jurisdictions, where better or worse performances can often be

explained by the policies pursued. In the new global economy—where

companies develop supply chains around the globe in search of higher

efficiency and lower costs for each component of the final product—the

province needs to do better not only in absolute terms but also in relation

to other jurisdictions.

We benchmark Newfoundland and Labrador’s competitive performance

against nine competitor jurisdictions: two countries, two U.S. states,

and five Canadian provinces. In total, 32 competitiveness indicators

are benchmarked. Four indicators—gross domestic product (GDP)

per capita levels and per capita growth and labour productivity

levels and labour productivity growth—present the “big picture” on

economic and competitive performance. The remaining indicators

are considered drivers of competitiveness and are grouped into four

categories: innovation, investment, human capital, and the business and

policy environment.

The Big Picture

Despite major economic and productivity gains during the 1997–

2007 period, Newfoundland and Labrador’s performance faltered for

the big-picture benchmarking indicators of gross domestic product and


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labour productivity due to its performance in more recent years. (See

Table 2.) After reaching very high levels of productivity and economic

growth by 2007, the economy has not made much progress since then.

Table 2Big Picture Indicators Summary

Indicator Newfoundland and Labrador’s grade

Newfoundland and Labrador’s rank

Real gross domestic product (GDP) per capita (2013 level)

C 6/10

Growth in real GDP per capita growth (compounded over 2008–13)

D 8/10

Labour productivity (GDP per hours worked) (2013 level)

B 5/10

Growth in labour productivity (compounded over 2008–13)

D 10/10

Sources: OECD; Statistics Canada; U.S. Bureau of Economic Accounts; The Conference Board of Canada.

Real gross domestic product per capita measures the average

standard of living of citizens and is the most common measure of

economic prosperity.1 Real GDP, rather than nominal GDP, is used

in order to remove the effect of inflation on the value of goods and

services produced. It does have shortcomings because it does not

convey how income is distributed or how much income is actually

available for personal consumption. Nonetheless, it is a key indicator of

economic prosperity and, along with GDP growth, sets the context for

benchmarking competitiveness.

Newfoundland and Labrador held a fairly middle-of-the-pack ranking of

GDP per capita in 2013. (See Chart 3.) The province scored a “C” grade

and ranked 6th out of the 10 jurisdictions. In 2013, Newfoundland and

1 In the benchmarking exercise, all GDP per capita calculations have been converted to US$ constant prices using constant purchasing price parities (PPP) and setting 2005 as the base year.




Labrador’s GDP per capita was US$39,700, some US$25,600 below

that of the top performer on this indicator—oil-rich North Dakota. The

province was third in terms of its provincial comparators.

While GDP per capita presents a snapshot of economic wealth at a

certain point in time, GDP per capita growth measures how quickly the

wealth is increasing. The average annual five-year real growth rate over

the 2008–13 period in Newfoundland and Labrador actually declined by

0.5 per cent. (See Chart 4.) This earned the province a “D” grade and a

rank of 8th out of the 10 jurisdictions. While it is true that this time period

included the recession, the global recession impacted all comparator

jurisdictions to various degrees. Six of the 10 comparator jurisdictions

managed to experience positive GDP per capita growth over the period,

having recovered their losses since the recession. North Dakota’s GDP

per capita growth dwarfed the other regions, as it expanded by 8 per

cent over the period. The state is experiencing a rapid economic boom

as it develops its oil extraction industry.

Chart 3Real GDP Per Capita, 2013(2005 US$ 000s, constant PPP)

N.B.N.S.Que.U.K.N.L.

Sask.Norway

TexasAlta.

N. Dakota

0 10 20 30 40 50 60 70

A B C D



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Labour productivity is the primary determinant of a region’s standard of

living over the longer term and is closely connected to competitiveness.

Labour productivity is GDP output per worker per hour worked. It is a

measure of how well labour inputs are being used to produce a given

level of output. This indicator captures the differences in average hours

worked across various industries and regions. Improving productivity

does not mean working harder or working longer; it means working

smarter, more efficiently. Productivity gains can be achieved in many

ways: fostering innovation, adopting new technologies, and increasing

capital intensity are critical; however, improving organizational practices,

increasing global integration, strengthening human capital, and improving

the business environment are equally crucial. These factors are

all interconnected.

Chart 4Real GDP Per Capita Growth, 2008–13(compound annual average growth, per cent)

U.K.Norway

N.L.N.B.Alta.Que.

Sask.N.S.

TexasN. Dakota

–2 –1 0 1 2 3 4 5 6 7 8 9

A B C D





Newfoundland and Labrador performs slightly better than average when

it comes to labour productivity levels. (See Chart 5.) For an average

hour of work in the province, almost US$50 in real GDP is generated.

The province ranks 5th of 10 and earned a “B” grade. Norway and the

U.S. states were the top performers, and only Alberta was ahead of

Newfoundland and Labrador when it came to provincial comparators.

There is no doubt that Newfoundland and Labrador achieved this high

productivity standing because of its mining industry, including the oil

and gas sector. A detailed analysis of Newfoundland and Labrador’s

productivity found that 78.2 per cent of the increase in labour productivity

between 1997 and 2010 can be directly attributed to the mining and

oil and gas sector.2 But, during the same time period, other industries

struggled to make productivity gains. The productivity contribution by

2 Grand’maison and Sharpe, A Detailed Analysis.

Chart 5Labour Productivity, 2013(real GDP per hour worked; constant 2005 US$, constant PPP)

N.B.N.S.Que.U.K.

Sask.N.L.Alta.

N. DakotaTexas

Norway

0 10 20 30 40 50 60 70

A B C D

Sources: OECD; Statistics Canada; The Conference Board of Canada.


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both the professional, scientific, and technical services industry and the

administrative and waste management services industry was negative

over the same period (though both have rebounded more recently).3

moreover, Newfoundland and Labrador has been unable to maintain the

rapid pace of labour productivity growth that it experienced during the

1997–2007 period. Labour productivity has actually declined since then,

along with a decline in oil production. (See “Productivity Performance

by Industry.”)

Newfoundland and Labrador’s labour productivity growth was the lowest

of all comparator jurisdictions over 2008–13, earning a “D” grade. (See

Chart 6.) The main reason for this stagnation in productivity improvement

is that oil production peaked in 2007. There were some shutdowns

in recent years that affected productivity, including one in June to

November 2012 at Terra Nova for maintenance that contributed to the

25 per cent decline in provincial oil production. A less severe shutdown

3 Ibid.

Chart 6Labour Productivity Growth, 2008–13(compound annual average growth, per cent)

N.L.Norway

U.K.Que.N.B.

Sask.Alta.N.S.

TexasN. Dakota

–2 –1 0 21 3 4 5

A B C D

Sources: Statistics Canada; OECD; The Conference Board of Canada.




occurred a year earlier in fall 2011 due to sour gas, but production

rebounded immediately after. Aside from these shutdowns, there has

been a general decline in oil production in the province since 2007 due

to natural declines in production as the resource is gradually exhausted.

There have also been concerns about skilled labour gaps in recent

years;4 the dearth of qualified workers for key jobs can also have a

negative impact on labour productivity.

Despite being one of the economies most negatively affected by the

2008–09 global recession, the U.S. experienced the largest labour

productivity gains of all the jurisdictions. The U.S. remains at the

forefront of innovation and technology adaption, and is widely viewed as

a global leader in labour productivity growth. North Dakota’s increases in

labour productivity were the best of the comparator regions due to the oil

boom experienced over the period.

Productivity Performance by Industry

Newfoundland and Labrador’s labour productivity is high but has not grown in

recent years. oil extraction activities propelled provincial labour productivity

growth over the 1997–2007 period, while many other industries experienced

few or no productivity gains. There has been much concern about whether

productivity gains can be sustained as the oil industry matures. We have seen

labour productivity stagnate since 2007. (See Chart 7.)

But there is a silver lining to the province’s productivity story. While overall

labour productivity has declined over the past five years, pushed down by

declining oil production, many other industries have experienced labour

productivity gains (although not enough to compensate for declines in the

mining, oil, and gas sector). In other words, the top-performing industries in the

province in terms of labour productivity levels happen to be the same industries

that are bottom performers when it comes to labour productivity growth over the

past five years. (See Table 3.) Specifically, the mining and oil and gas industries

and the agriculture, forestry, fishing, and hunting industries are some of the

4 mcCarthy, “Labour Shortage Looms.”

The U.S. remains at the forefront of innovation and technology adaption, and is widely viewed as a global leader in labour productivity growth.


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Chart 7N.L.’s Labour Productivity Has Not Improved, 2007–13(growth, or decline, by industry (left axis); size of bubble denotes level of productivity in 2007 $ per hour)

–25

–20

–15

–10

–5

0

5

10

15

Business services

Construction

Agriculture, forestry, fishing, hunting

Manufacturing

Total economy

Utilities

Mining, incl. oil and gas


Table 3Industries With Highest Productivity Levels Experienced Slowest Growth(labour productivity levels in real GDP per hour worked, 2007 $, average over 2007–13; labour productivity growth compounded annually over 2008–13)

Top performers

Productivity levels Productivity growth

N.L. Can N.L. Can

Total economy 68.21 50.3 –1.110 0.8

Business sector industries 73.91 47.2 –1.210 0.6

Business sector, goods 150.31 60.2 –6.010 0.6

Agriculture, forestry, fishing, hunting 40.01 31.3 3.27 4.6

Mining and oil and gas extraction 836.31 247.5 –15.610 –1.4

Note: The superscript numbers in the N.L. columns indicate the provincial ranking.Sources: Statistics Canada; The Conference Board of Canada.




top performers in the province in terms of their productivity levels but have

experienced some of the slowest growth in the country. The mining industry’s

(including oil and gas extraction) labour productivity level in Newfoundland and

Labrador is fourfold the national average; over 2007–13, labour productivity in

the mining, oil, and gas industry averaged $836 in real output per hour worked.

The second-highest performer was manitoba’s mining industry, which produced

only $361 output per hour worked. oil-rich Alberta’s mining industry ranked fifth

in labour productivity.

The opposite is true for the top industry performers in the country in terms of

labour productivity growth. Generally, these industries are sitting in the middle

Table 4Industries With Highest Productivity Growth Still Have Room for Improvement(labour productivity levels in real GDP per hour worked, 2007 $, average over 2007–13; labour productivity growth is compounded annually over 2008–13)

Top performers

Productivity levels Productivity growth

N.L. Can N.L. Can

Construction 38.44 38.1 8.51 –0.6

Manufacturing 43.88 50.8 4.31 1.2

Wholesale trade 46.17 51.4 3.21 1.7

Retail trade 24.57 26.6 3.81 2.1

Transportation and warehousing 36.27 40.7 2.51 0.3

Information and cultural industries 107.42 84.6 17.21 –0.3

Finance and insurance, and holding companies

59.75 69.3 3.01 –1.6

Professional, scientific, and technical services

35.97 41.5 2.31 0.2

Administrative and support, waste management, and remediation services

25.14 26.2 3.71 –0.1

Accommodation and food services 18.25 19.1 4.01 0.7

Total business sector, services 34.67 41.2 3.11 0.7

Note: The superscript numbers in the N.L. columns indicate the provincial ranking.Sources: Statistics Canada; The Conference Board of Canada.


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to bottom of the country when it comes to productivity levels, meaning they

have room to continue to grow. (See Table 4.) In fact, three of the top industries

(in terms of labour productivity growth)—retail trade, manufacturing, and

construction—add more than $1 billion to Newfoundland and Labrador’s real

GDP, so their contribution is substantial. With the exception of manufacturing

and construction, all of the top-performing industries in terms of labour

productivity growth are in the services sector. A study by the Centre for the

Study of Living Standards found evidence of spillover productivity effects from

the high productivity growth in the oil sector.5

Declining labour productivity is less of a concern at present since the province

is still enjoying middle-of-the pack productivity performance against its

comparator jurisdictions. however, the province may be at risk of falling behind

its competitors as the others slowly overtake it. Alberta’s labour productivity has

been higher than Newfoundland and Labrador’s since 2011, and all of the other

provincial competitors have experienced labour productivity growth over the last

five years. Despite many industries increasing their productivity at encouragingly

fast rates, this is not enough to compensate for faltering mining (including oil

and gas) labour productivity. The mining industry accounts for one-third of the

entire economy.

Innovation

Innovation is the ability to turn knowledge into new and improved goods

and services, and technological innovation fosters economic growth

by enhancing the efficiency of labour and capital. Innovative products

and processes lead to better production methods. Knowledge gained

through research and development (R&D) and by using new products

and services leads to further economic growth. overall, countries that

are more innovative perform much better on measures such as income

5 Grand’maison and Sharpe, A Detailed Analysis.




per capita, productivity, and the quality of social programs.6 Without

innovation, a region’s competitive performance deteriorates relative to

that of its peers.

Innovation is a difficult concept to quantify, and only a few internationally

comparable indicators measure the actual innovation outcomes in a

given region. Unfortunately, there are few indicators available that can

be used to compare the innovation outcomes of international regions

with those of Canadian provinces. Therefore, in this report, we include

two innovation input indicators as proxies for innovation outcomes:

business expenditures on R&D and public expenditures on R&D. A

third indicator—patent applications—is used to gauge how well the

jurisdictions transform knowledge into usable inventions. Newfoundland

and Labrador performs poorly on all innovation indicators. (See Table 5.)

Table 5Innovation Indicators Summary



Business expenditures on research and development

D 8/10

Public expenditures on research and development

C 8/10

Patent applications per million people D 10/10


A strong positive correlation has been shown to exist between business

R&D intensity and GDP per capita.7 Since business sector R&D is

highly market oriented, it is a critical link between innovation and

commercialization of ideas. Firms that take innovative products and

services to market can make substantial contributions to economic

growth and employment.

6 The Conference Board of Canada, How Canada Performs 2013.

7 Aiginger and Falk, “explaining Differences in economic Growth.”


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Newfoundland and Labrador performs poorly on the business

expenditures on R&D indicator, earning a “D” and ranking 8th out of

the 10 regions. (See Chart 8.) The jurisdictions that performed well

all have larger populations and more diversified economies. The top

performer is quebec, a province that has long supported R&D through

fiscal incentives. Similar to other jurisdictions, the province offers R&D

investors tax breaks, but it goes even further by offering generous tax

incentives for firms that partner each other. This helps anchor R&D

activities within the province and helps both large and small companies

alike.8 As a result, quebec is home to R&D investments in health care,

biotech, transportation, and digital design and gaming.

economies that are heavily reliant on oil, such as Norway, North Dakota,

and Alberta, have lower levels of investment in R&D relative to the size of

their economies. only Saskatchewan and Nova Scotia have lower levels

of business R&D than Newfoundland and Labrador.

8 ovsey, “R&D Tax-Credit Program.”

Chart 8Business Expenditures on R&D, 2007–11 Average(as a percentage of GDP)

Sask.N.S.N.L.N.B.Alta.

N. DakotaNorway

U.K.TexasQue.

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

A B C D





Public investment in R&D (which includes both government and

higher education spending) is the next indicator. While the link to

implementation and commercialization is generally weaker in public

sector R&D compared with its business counterpart, public R&D

spending is important because it is often focused on the basic research

that underpins an innovative economy but that businesses are less

inclined to conduct.9

Newfoundland and Labrador earns a “C” grade on public R&D

expenditures and ranks 8th of 10. (See Chart 9.) Some economies

specialize in either public performed R&D or business performed R&D.

Note that some of the jurisdictions that ranked poorly on the business

R&D indicator did well on the public metric (Nova Scotia and New

Brunswick). The worst performer is Texas, a state that placed second

best on the business R&D measure. Newfoundland and Labrador,

however, performs poorly on both indicators.

9 The Conference Board of Canada, Public R&D Spending.

Chart 9Public Expenditures on R&D, 2007–11 Average(government and higher education R&D spending as a percentage of GDP)

TexasAlta.N.L.U.K.

Sask.N. Dakota

N.B.Norway

Que.N.S.

0.0 0.2 0.4 0.6 0.8 1.0 1.2

A B C D

Note: Provincial average over 2007–10 for higher education component. Sources: OECD; Statistics Canada; The Conference Board of Canada.


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There is a direct link between patents and economic prosperity. Patents

protect the investments that businesses have made in R&D: “Without

the possibility of patent protection, many people might not take the

risk of investing the time or money necessary to create or perfect new

products, without which our economy would suffer.”10 Newfoundland

and Labrador has the lowest number of patent applications of all the

comparator jurisdictions, scoring a “D” grade on the patents indicator.

(See Chart 10.) This comes as no surprise given the province’s low

standing in R&D spending.

Investment

The link between investment and labour productivity is long-standing.

Investment is associated with productivity gains and increased economic

activity as workers use the latest technologies (investment in machinery

and equipment); as goods and services move to markets efficiently

10 Canadian Intellectual Property office, A Guide to Patents.

There is a direct link between patents and economic prosperity: patents protect the investments that businesses have made in research and development.

Chart 10Patent Applications, 2006–10 Average(PCT patent applications per million people)

N.L.N.B.N.S.

Sask.N. Dakota

Alta.Que.U.K.

TexasNorway

0 20 40 60 80 100 120 140 160

A B C D

Sources: OECD; The Conference Board of Canada.




(investment in infrastructure); and as new factories and offices are built

(investment in non-residential structures). Investment indicators act

somewhat as a barometer of what is to come, since there is often a lag

between investments and results.11 Newfoundland and Labrador has

experienced a mixed performance in investment indicators, despite many

large capital investments occurring since 1997. (See Table 6.)

Table 6Investment Indicators Summary



Business investment in machinery and equipment as a percentage of GDP

D 7/9*

Business investment in non-residential structures as a percentage of GDP

C 4/9*

Inward greenfield foreign direct investment

A 1/9*

Government investment in gross fixed capital formation (provincial comparison only)

– 8/10 provinces

Average age of public infrastructure (provincial comparison only)

– 9/10 provinces

*due to data availability, Texas and North Dakota data replaced with U.S. national data Sources: OECD; Statistics Canada; The Conference Board of Canada.

Natural resources projects generally contain business sector investments

in both machinery and equipment (m&e) and in non-residential

structures, but the type and timing of a project can influence the split

between the investment components. For example, a new mine might

focus its spending in the first several years of development on non-

residential structures and then concentrate its investments on m&e

during the last year of development.

11 Baldwin and others, Investment in Intangible Assets.


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Business investment in m&e is associated with the adoption and

diffusion of the latest state-of-the-art technologies that, in turn, lead

to growth in labour productivity. Newfoundland and Labrador ranked

7th out of 9 on the business m&e investment indicator, earning a “D”

grade. (See Chart 11.) m&e investments account for less than 4 per cent

of GDP in the province compared with more than 6 per cent in the top-

performing U.S. economy

While the province does not perform well on m&e investment as a

percentage of GDP, Newfoundland and Labrador experienced large

growth in m&e investments over 2008–12. In fact, m&e investments

experienced double-digit annual growth during that period, and

Saskatchewan was the only other jurisdiction to experience such rapid

gains. (See Chart 12.) This means that the province is catching up to

its competitors. early estimates indicate that investments in m&e in

2013 and 2014 were higher than average, which likely will help to close

the gap in the investment levels between Newfoundland and Labrador

and its competitors.

Chart 11Investment in Machinery and Equipment, 2008–12 Average(investment of M&E as a percentage of GDP; inflation-adjusted)

U.K.

Que.

N.L.

N.S.

N.B.

Sask.

Norway

Alta.

U.S.

0 2 41 3 5 6 7

A B C D





While business investments in m&e are generally linked with productivity

improvements, business investments in non-residential structures are

generally associated with increased economic activity and GDP growth.

In Newfoundland and Labrador’s case—and in any economy focused on

natural resources—this adage is not as simple because the two types

of investments go hand in hand, greatly influenced by the timing of the

investment. Newfoundland and Labrador performs in the middle of the

pack on the business investment in non-residential structures indicator,

ranking 4th of 9 and earning a “C” grade. (See Chart 13.)

During the 2008–12 period, businesses in Newfoundland and

Labrador made some large investments in key resource industries.

These investments tended to have a greater impact in non-residential

structures as opposed to m&e. Iron ore and nickel mining investments,

as well as the construction of offshore oil platforms, contributed to

this indicator. only three comparator jurisdictions outmatched the

province’s non-residential investment levels as a share of GDP—Alberta,

Saskatchewan, and Norway.

Chart 12Growth in Machinery and Equipment Investment(average annual compound growth rate of inflation-adjusted investment over 2008–12)

U.K.

Alta.

Que.

Norway

U.S.

N.S.

N.B.

N.L.

Sask.

–4 –2 0 2 4 6 8 10 12



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Similar to m&e investments, the province experienced a rapid rise in

non-residential business investments during the years 2008 to 2012.

In fact, Newfoundland and Labrador posted the fastest growth of all

competitor jurisdictions. (See Chart 14.) however, the province had

the lowest starting point of all jurisdictions, which inflates the growth

numbers. Still, a lot of large capital-focused, non-residential investment

projects took place in the province following the recession.

Inward foreign direct investment (FDI) reflects a region’s attractiveness

for doing business. There can be many factors that result in a decision

to invest abroad, including political climate, tax rates, the workforce, and

natural resource endowments.

Chart 13Business Investment in Non-Residential Structures, 2008–12 Average(investment in non-residential structures as a percentage of GDP)

Que.

N.S.

N.B.

U.S.

U.K.

N.L.

Norway

Sask.

Alta.

0 2 4 6 8 10 12 14 16

A B C D





The inward greenfield FDI performance index is benchmarked because

it captures the relative success of a region in attracting global greenfield

FDI. If a region’s share of global inward greenfield FDI matches

its relative share in global GDP, the region’s inward greenfield FDI

performance index is equal to one. A value greater than one indicates a

larger share of greenfield FDI relative to GDP share, meaning the region

attracts more inward FDI than its economic size would suggest. A value

less than one indicates a smaller share of greenfield FDI relative to

GDP share.

Newfoundland and Labrador is the top performer on inward greenfield

FDI by a large margin, scoring an “A” and ranking first among

competitors. (See Chart 15.) Newfoundland and Labrador’s large mining

sector and offshore oil resources have attracted inward FDI to the

province, and the province’s top-place ranking means that it attracts

more inward greenfield FDI than its economic size would suggest.

Newfoundland and Labrador’s GDP is small relative to that of other

provinces. So, even though its average inward FDI flows between

2008 and 2012 were lower than the FDI flows to provinces like Alberta

Chart 14Growth in Business Non-Residential Structures Investment(average annual compound growth rate of inflation-adjusted investment, 2008–12)

N.B.

U.K.

U.S.

Norway

N.S.

Alta.

Que.

Sask.

N.L.

–10 –5 0 5 10 15 20 25 30 35 40



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and Saskatchewan, Newfoundland and Labrador performs well on the

index because it is attracting a higher share of greenfield FDI than its

small economic size would suggest.

So far, we have seen that Newfoundland and Labrador has experienced

large growth in private sector investments, but that the province still

needs higher levels of investment if it hopes to close the investment-

gap between itself and its competitors. But investments by governments

can also impact competitiveness. There are two government investment

indicators included with provincial-level data in the benchmarking

analysis: government investment in fixed capital formation, and the

average age of public infrastructure. Due to data limitations, comparable

data could not be obtained for international jurisdictions.

Chart 15Inward Foreign Direct Investment, 2008–12 Average(inward greenfield FDI performance index)

Norway

U.S.

Que.

N.S.

Sask.

Alta.

N.B.

U.K.

N.L.

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

A B C D

Sources: fDi Markets; The Conference Board of Canada.




Government investments in fixed capital include improvements to

transportation infrastructure, as well as the building of or improvements

to hospitals and schools. This indicator does not include non-capital

expenditures such as salaries. Generally, high levels of government

investment can support the economy by allowing goods to move more

efficiently to markets (in the case of transportation investments) or by

strengthening human capital by providing better access to health and

education institutions.

Newfoundland and Labrador does not perform very well on government

investment, ranking 8th out of the 10 provinces. (See Chart 16.)

Government investments account for only 3.4 per cent of GDP in the

province, while half of the provinces post shares of over 4 per cent.12

12 A 10-year period was chosen to include a period before the recession and its associated increase in government infrastructure spending to support the economy.

Chart 16Government Investment in Gross Fixed Capital Formation, 2004–13 Average(government investment as a percentage of GDP)

Sask.Alta.N.L.B.C.Ont.

Man.Que.N.S.N.B.

P.E.I.

0 21 3 4 5 6

Newfoundland and Labrador’s competitors



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Poor performance in government investment is also reflected in the

average age of public infrastructure in the province. Public infrastructure

consists of the following five assets: roads and highways, bridges and

overpasses, water supply systems, waste water treatment facilities, and

sewer systems. The average age of Newfoundland and Labrador’s

public infrastructure is 16.7 years, second only to Saskatchewan’s.

(See Chart 17.)

Government investment increased substantially during the recession

and in subsequent years, with the federal and provincial governments

investing in infrastructure as a way to stimulate the economy. This

reduced the average age of public infrastructure in all provinces. In

2007, Saskatchewan (17.6 years), manitoba (17.7 years), and Nova Scotia

(18 years) all had older public infrastructure than Newfoundland and

Labrador, while quebec was tied with the province at 17.2 years.13 Since

2007, quebec, manitoba, and Nova Scotia have increased infrastructure

13 Gagnon, Gaudreault, and overton, Age of Public Infrastructure.

Chart 17Average Age of Public Infrastructure, 2012(years)

Sask.N.L.N.S.N.B.Man.P.E.I.B.C.Que.Alta.Ont.

12 13 14 15 16 17


Sources: Infrastructure Canada; Statistics Canada; The Conference Board of Canada.




spending at faster rates than Newfoundland and Labrador. By 2012,

only Saskatchewan had older public infrastructure than Newfoundland

and Labrador. Note that these provinces also had some of the lowest

infrastructure spending, as seen in Chart 15.

Human Capital

human capital is one of the building blocks of any society and has

a substantial influence on competitiveness. Thirteen indicators are

benchmarked, using international and provincial comparator regions,

and are grouped into two subcategories: education and skills, and the

labour market.

Education and SkillsRegions with a well-educated and highly skilled workforce have a

competitive advantage, as skilled and educated workers are able to

adopt new technologies and improve processes. Increased general

education levels boost overall productivity in an economy, with plausible

estimates showing a 5 per cent increase in labour productivity for each

additional year of average school attainment.14 There are other positive

benefits to society as well. higher-education attainment is linked to

many non-monetary benefits such as higher overall job satisfaction, less

unemployment, improved health, lower divorce rates, lower crime rates,

and a higher degree of trust in others.15

Newfoundland and Labrador scores in the middle to low end of the pack

in terms of education and skills human capital indicators. (See Table 7.)

The province is clearly a low performer when it comes to university

completion and adult skills, but it places in the middle of the pack on the

other indicators.

14 de la Fuente and Ciccone, Human Capital.

15 oreopoulos and Salvanes, “Priceless.”

Regions with a well-educated and highly skilled workforce have a competitive advantage, as skilled and educated workers are able to adopt new technologies and improve processes.


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Table 7Part 1: Education and Skills Human Capital Indicators Summary



University completion D 9/10

College completion B 5/9*

Science, math, computer science, and engineering graduates per 100,000

B 3/9*

Apprenticeship completion – 6/10 provinces

Student skills C 5/9*

Adult skills D 9/9*

*due to data availability, Texas and North Dakota data replaced with U.S. national data Sources: Statistics Canada; OECD; American Community Survey; World Bank; Council of Ministers of Education Canada; U.S. Bureau of Labor Statistics; U.S. Census Bureau; Statistics Norway; UK’s Office for National Statistics; The Conference Board of Canada.

Newfoundland and Labrador is tied with New Brunswick for having the

lowest university-educated population out of all its competitors, earning

a “D” grade. (See Chart 18.) Some 18.4 per cent of the population

aged 25–64 has a university degree compared with 35.8 per cent of the

workforce in Norway, which is the top performer.

University degree attainment has been increasing around the globe and

Newfoundland and Labrador has experienced this trend as well. Chart 19

shows university completion for a younger age cohort, the 25–34 year

olds, compared with the older age cohort of those aged 55–64 year olds.

Despite an 11 percentage point improvement in university completion

from one generation to the next, Newfoundland and Labrador’s

25–34 age cohort remains the lowest university-educated population of

all the competitors. Less than one-quarter of the province’s population

aged 25–34 has a university degree compared with almost half of

Norway’s young adult population.




Chart 18University Completion, 2012 (Norway and U.K., 2011)(percentage of the population aged 25 to 64 with a university degree)

N.B.N.L.

Sask.Alta.Que.N.S.

TexasU.K.

N. DakotaNorway

10 15 20 25 30 35 40

A B C D

Sources: Statistics Canada; OECD; American Community Survey; The Conference Board of Canada.

Chart 19University Completion, by Generation, 2011(percentage of the population that has a university degree, by age)

N.L.

Sask.

N.B.

Alta.

Que.

U.S.

N.S.

U.K.

Norway

0 5 10 15 20 25 30 35 40 45 50

25–34 55–64



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College diplomas are also an important indicator of the quality of human

capital. These diplomas are often more applied in nature compared with

university degrees, so they can be very beneficial to the workforce. In

fact, an increasing number of university graduates are leveraging their

education by completing a college diploma after university.16

Newfoundland and Labrador scores a “B” grade and ranks in the middle

of the pack in terms of college completion. (See Chart 20.) This is

encouraging, given the province’s low university completion rates. Note

that some of the lower performers on the university completion indicators

perform much better on the college completion, and vice versa. (For

example, New Brunswick ranks last in university completion but first in

college completion; Norway is the opposite.)

In some economies, college diplomas might align better with the needs

of the workforce. It has been argued that the “returns to education”

are much greater for university degrees because of higher earnings,

16 Bayard and Greenlee, Graduating in Canada.

Chart 20College Completion, 2011(percentage of the population aged 25 to 64 with a college diploma)

Norway

U.K.

U.S.

Sask.

N.L.

Alta.

Que.

N.S.

N.B.

0 5 10 15 20 25 30

A B C D





but the field of study might be more important than the type of degree

obtained. It is the relevance of the degree that impacts the market price

for skilled talent.

University graduates of science, mathematics, computer science,

and engineering programs are linked to the innovative capacity of an

economy. Newfoundland and Labrador scores well on this indicator,

earning a “B” and ranking 3rd out of 9 regions. (See Chart 21.) Therefore,

even though the provincial score is low for the number of university

degrees its populace holds, Newfoundland and Labrador universities

graduate a large number of students in fields linked to innovation.

Apprenticeships are another type of skills qualification that is important

in a resource-based economy such as Newfoundland and Labrador’s. It

is difficult to discern objectively whether or not there is a skills shortage

in the province. But there is some anecdotal evidence from job sites,17

17 Ballingall, “economic Boom Brings a Labour Shortage to Newfoundland.”

Chart 21Science, Math, Computer Science, and Engineering University Graduates, 2011(graduates in specified subjects per 100,000 people, aged 20–39)

Sask.

N.B.

Alta.

U.S.

Norway

Que.

N.L.

N.S.

U.K.

0 100 200 300 400 500 600 700 800 900 1,000

A B C D



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and rapidly rising wages are one indicator of a shortage. The aging

population will exacerbate the shortages in the future. Newfoundland and

Labrador ranks in the middle of the pack against provincial comparators.

(Due to data constraints and differing definitions, international

comparisons cannot be made on this indicator.) (See Chart 22.) The

province completes less than half the number of apprenticeships as a

share of the labour force than does the top province, Alberta.

Newfoundland and Labrador is making some gains when it comes to

apprenticeship completions. In 2002, apprenticeship completions made

up only 0.07 per cent of the labour force but, by 2012, this proportion had

grown to 0.17 per cent. (See Chart 23.) This is, however, a decrease from

its 2009 peak. meanwhile, other competitors have continued to increase

apprenticeship completions.

Chart 22Apprenticeship Completions as a Share of the Labour Force, 2008–12 Average(per cent)

N.S.P.E.I.Ont.N.B.N.L.

Man.Que.B.C.

Sask.Alta.

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40






So far, this report has looked at educational attainment as a contributor

to human capital and therefore competition. But it is important to

determine the degree to which a workforce has the skills to generate

valued products and services, regardless of educational qualifications.

The next two indicators benchmark the skills of students and adults.

The oeCD evaluates the skill levels of 15 year olds by administering

tests in reading, science, and math. The results of these tests are used

to benchmark student skills in each jurisdiction. Newfoundland and

Labrador’s students earned a “C” grade for student skills, ranking 5th out

of 9 against its competitors. (See Table 8.) The top-performing students

reside in Alberta, quebec, and Nova Scotia.

Chart 23Apprenticeship Completions as a Share of the Labour Force, 2002–12(per cent)

2000 01 02 03 04 05 06 07 08 09 10 11 12

0.000.050.100.150.200.250.300.350.400.45

N.L.

N.S.

N.B. Sask.

Alta.Que.



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Table 8Student Skills Summary, 2012

1 Alberta A 6 United Kingdom C

2 quebec A 7 New Brunswick C

3 Nova Scotia B 8 Norway D

4 Saskatchewan B 9 United States D

5 Newfoundland and Labrador C

Sources: OECD; Council of Ministers of Education Canada; The Conference Board of Canada.

The breakdown by type of skill shows where Newfoundland and

Labrador can make improvements. Newfoundland and Labrador’s

students earn a “B” in science skills but rank 5th out of 9 on the indicator.

(See Chart 24.) The indicator evaluates students’ ability to “make

decisions based on scientific knowledge” and “interpret and use scientific

concepts from different disciplines.”18 At 73 per cent, Alberta has a higher

proportion of students performing at this level than all other competitors.

In comparison, less than 65 per cent of students in Newfoundland and

Labrador achieved this level of competency.

Reading skills are highly valued in any economy. Students with

medium to high levels of reading are “capable of reading tasks of

moderate complexity, such as locating multiple pieces of information,

making links between different parts of a text, and relating it to familiar

everyday knowledge.”19

Newfoundland and Labrador scores a “C” on reading skills and ranks

6th out of 9. (See Chart 25.) Some 61 per cent of students had adequate

reading skills (i.e., achieving a level 3 or higher out of 6 on the oeCD

test), compared with 70 per cent in Alberta, the top performer. New

Brunswick ranked the lowest, with 58 per cent achieving adequate

reading skills.

18 oeCD, PISA 2009 Results.

19 Ibid.




mathematics is the third skill in which students were tested. The

oeCD emphasizes the importance of these skills in modern society

and points out that “a growing proportion of problems and situations

Chart 24Students With Medium- to High-Level Science Skills, 2012(percentage of 15-year-old students, level 3 or higher out of 6)

U.S.

Norway

N.B.

U.K.

N.L.

Sask.

N.S.

Que.

Alta.

50 55 60 65 70 75

A B C D


Chart 25Students With Medium- to High-Level Reading Skills, 2012(percentage of 15-year-old students, level 3 or higher out of 6)

N.B.

U.S.

U.K.

N.L.

Norway

Sask.

N.S.

Que.

Alta.

50 55 60 65 70 75

A B C D



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encountered in daily life, including in professional contexts, requires

some level of understanding of mathematics, mathematical reasoning,

and mathematical tools, before they can be fully understood

and addressed.”20

Newfoundland and Labrador students do not perform very well in math.

The province earns a “C” grade and ranks 7th out of 9. (See Chart 26.)

quebec ranks first and is the only jurisdiction with an “A” grade.

quebec instituted major educational reforms in the early 2000s, and the

philosophy behind math instruction was overhauled. The philosophy is

grounded more in problem-solving and “discovery learning” and less

in memorizing equations.21 Newfoundland and Labrador has recently

instituted a similar approach to teaching math (phased in over 2008–13),

but it is too soon to say whether the new approach is leading to improved

student math outcomes.

20 oeCD, PISA 2012 Assessment and Analytical Framework.

21 Peritz, “quebec might hold the Formula.”

Chart 26Students With Medium- to High-Level Math Skills, 2012(percentage of 15-year-old students, level 3 or higher out of 6)

U.S.

Norway

N.L.

U.K.

N.S.

N.B.

Sask.

Alta.

Que.

40 45 50 55 60 65 70 75

A B C D





While student skills are an indicator of future prosperity and

competitiveness, adult skills are indicative of the current quality of the

workforce. Firms consistently rate employee skills as one of the top

four factors needed for innovation success.22 The oeCD evaluates

the numeracy, literacy, and problem-solving skills of the working-age

population (aged 16–65). The summary of the benchmarking results

for this indicator are in Table 9. Norway’s and Alberta’s working-age

populations have the highest overall skills in the workforce, while

Newfoundland and Labrador places last on the list.

Table 9Adult Skills Summary, 2012

1 Norway A 6 quebec C

2 Alberta A 7 United States D

3 Nova Scotia B 8 New Brunswick D

4 United Kingdom C 9 Newfoundland and Labrador D

5 Saskatchewan C


Adult literacy determines a worker’s ability to find and keep a job as well

as a worker’s wages.23 Newfoundland and Labrador earns a “D” and

ranks last in literacy proficiency. (See Chart 27.) Some 43 per cent of the

province’s working-age population achieved a medium to high level of

literacy, compared with 57 per cent of Norwegians.

Numeracy skills are another contributor to workforce success. on

average, a one-standard-deviation increase in numeracy skills is

associated with a 19 per cent wage increase among prime-age workers

in Canada.24 Newfoundland and Labrador earns a “D” on this measure

and again ranks last. (See Chart 28.)

22 Watt and munro, Skills for Business Innovation Success.

23 oeCD, OECD Skills Outlook 2013.

24 hanushek and others, “Returns to Skills Around the World.”


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The third type of adult skill measured is problem-solving skills in

technology-rich environments. This skill is defined as the “ability to use

digital technology, communication tools and networks to acquire and

Chart 27Adults With Medium- to High-Level Literacy Skills, 2012(percentage of adults aged 16–65, level 3 or higher out of 5)

N.L.

N.B.

Que.

U.S.

U.K.

N.S.

Sask.

Alta.

Norway

40 42 44 46 48 50 52 54 56 58 60

A B C D


Chart 28Adults With Medium- to High-Level Numeracy Skills, 2012(percentage of adults aged 16–65, level 3 or higher out of 5)

N.L.

N.B.

Que.

U.S.

U.K.

N.S.

Sask.

Alta.

Norway

30 35 40 45 50 55 60

A B C D





evaluate information, communicate with others and perform practical

tasks.”25 Less than 30 per cent of Newfoundland and Labrador’s working-

age population scored 2 or higher out of 3 on the problem-solving

exercise, compared with more than 40 per cent in Norway, the best

performer. (See Chart 29.) The province ranked last out of its competitors

and earned a “D” grade.

Labour MarketThe second grouping within the human Capital category relates to the

labour market. Seven labour market indicators have been benchmarked.

The indicators aim to draw an overall picture of the current and

future labour force. Newfoundland and Labrador scores poorly on

labour market indicators, despite the boom in the resources sector.

(See Table 10.)

25 Ibid.

Chart 29Adults With High-Level Problem-Solving Skills, 2012(percentage of adults aged 16–65, level 2 or higher out of 3)

N.L.

N.B.

U.S.

Que.

Sask.

U.K.

N.S.

Alta.

Norway

24 26 28 30 32 34 36 38 40 42

A B C D

Sources: Employment and Social Development Canada; OECD; Statistics Canada; The Conference Board of Canada.


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Table 10Part 2: Labour Market Human Capital Indicators Summary



Labour force participation D 9/10

employment growth C 4/10

Unemployment rate D 10/10

Unit labour cost growth D 9/9*

Work stoppages due to strikes and lockouts C 8/9*

Population aging D 9/9*

Net migration D 8/10

*due to data availability, Texas and North Dakota data replaced with U.S. national data Sources: Statistics Canada; OECD; American Community Survey; World Bank; Council of Ministers of Education Canada; U.S. Bureau of Labor Statistics; U.S. Census Bureau; Statistics Norway; UK’s Office for National Statistics; The Conference Board of Canada.

Participation in the labour force gauges the attractiveness of the

employment opportunities available and the matching of skills and

qualifications of the population and the economy. This measure is called

the labour force participation rate and is the proportion of the population

aged 15 and older who are either employed or unemployed but actively

looking for work. Newfoundland and Labrador ranks second to last,

earning a “D” grade. (See Chart 30.) Alberta scores the highest on this

indicator, with 73 per cent of its population engaged in the labour force;

this is 12 percentage points higher than Newfoundland and Labrador’s

participation rate.

Newfoundland and Labrador added 44,000 jobs over the years 1997–

2013, fuelled by the development of the oil and gas industry and mining

investments. This is impressive considering that the population shrank by

33,200 during the same period. (See Chart 31.)

Although the province was successful in generating thousands of jobs,

the average annual employment growth rate is middle of the pack

compared with the province’s competitors. over the past five years,




Newfoundland and Labrador’s employment has grown by 1.3 per cent on

average. This rate is the 4th-fastest of the 10 competitors and earns the

province a “C” grade. (See Chart 32.)

Chart 30Labour Force Participation Rate, 2013(percentage of population aged 15+ that is either employed or unemployed but actively looking for work)

U.K.N.L.N.B.

TexasN.S.Que.

NorwaySask.

N. DakotaAlta.

50 55 60 65 70 75

A B C D


Chart 31Newfoundland and Labrador’s Employment and Population Change(000s)

1996 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

180

190

200

210

220

230

240

250

500

510

520

530

540

550

560

570

Employment (left) Population (right)



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North Dakota experienced the fastest employment growth over the

last five years, growing 3.6 per cent on average. In fact, the state is

experiencing large-scale labour shortages and officials estimate that

unfilled positions totalled 25,000 in early 2014.26

The offshore oil production and metal mining boom in Newfoundland

and Labrador has pushed the unemployment rate to its lowest on record.

(See Chart 33.) however, there are many seasonal industries, including

fishing, hunting, and food processing, which results in structurally higher

rates of unemployment. moreover, the economy has had many mega-

projects that require large numbers of workers for short periods of time,

so tradespeople can spend more time looking for work between projects.

Newfoundland and Labrador has the highest unemployment rate

compared with its competitors, earning it a “D” grade. (See Chart 34.)

The province’s unemployment rate was 11.5 per cent in 2013, compared

with 2.9 per cent in North Dakota. The Western provinces had

unemployment rates under 5 per cent.

26 macPherson, “North Dakota Desperate for Workers.”

Chart 32Employment Growth, 2008–13(average annual compound growth rate, per cent)

N.B.N.S.U.K.Que.

NorwayTexas

N.L.Sask.Alta.

N. Dakota

–0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

A B C D

Sources: Statistics Canada; OECD; U.S. Bureau of Labor Statistics; The Conference Board of Canada.




Unit labour cost growth has long been an indicator of competitiveness.

The indicator measures the labour costs to the firm (including wages,

salaries, and employers’ payroll contributions) per unit of production.

Therefore, an increase in unit labour costs means that the labour

costs are growing faster than labour productivity, that it is becoming

more costly for firms to produce their goods or services. A country

Chart 33Newfoundland and Labrador’s Unemployment Rate(per cent)

1987 89 91 93 95 97 99 01 03 05 07 09 11 13

10

12

14

16

18

20

22


Chart 34Unemployment Rate, 2013(percentage of the labour force that is unemployed)

N.L.N.B.N.S.U.K.Que.

TexasAlta.

Sask.Norway

N. Dakota

0 2 4 6 8 10 12

A B C D

Sources: OECD; Statistics Canada; U.S. Bureau of Labor Statistics; The Conference Board of Canada.


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can improve its unit labour cost competitiveness by either decreasing

its labour costs or raising the productivity performance, or by some

combination of both.

Newfoundland and Labrador had the fastest growing unit labour costs

compared with its competitors (see Chart 35), meaning that wage

inflation is outpacing labour productivity. The U.S. has the lowest unit

labour cost growth, largely reflective of the impacts of the recession.

Alberta’s labour productivity has kept pace with wage inflation despite

skilled labour shortages.

Unit labour cost levels are less used than unit labour cost growth as

an indicator of competitiveness. Levels are not as reliable, since using

exchange rates for comparability does not fully capture the price-

quantity differences.27 But comparisons within Canada can be made,

and Newfoundland and Labrador has the lowest levels of unit labour

costs. This has two implications. First, low unit labour cost levels

27 Turner and Van ‘t dack, “measuring International Price and Cost Competitiveness.”

Chart 35Growth in Unit Labour Costs, 2008–12(average annual compound growth rate, per cent)

N.L.

Sask.

Norway

N.B.

N.S.

Que.

Alta.

U.K.

U.S.

0 2 3 7 81 4 5 6 9

A B C D





imply a competitive advantage because labour costs less per unit of

output in the province. Two, it means that the high levels of growth in

unit labour costs (as observed in N.L. in Chart 35) need to be taken

with caution because costs could be simply converging with those of

competitors. Therefore, right now, unit labour costs as they stand should

not be considered a problem. But the current high levels of growth

mean that wage inflation is outpacing productivity, and this can be a

red flag for attracting businesses to the province in the future if this

growth continues.

Work stoppages due to strikes and lockouts are an indicator of the

health of labour and business relationships. Work stoppages affect

economic competitiveness, since firms struggle in the short term to

produce products and services during these periods. In the long term,

the province may struggle to attract investment when there is instability

in labour relations. Newfoundland and Labrador has high levels of work

stoppages and earns a “C” grade, ranking 8th out of 9 on the indicator;

only quebec experienced longer work stoppages. (See Chart 36.)

Chart 36Working Days Not Worked Due to Strikes and Lockouts, per 1,000 Employees, 2005–13(annual average number of days, per 1,000 employees, 2005–13 [2005–12 in U.S.])

Que.

N.L.

N.B.

Sask.

Norway

N.S.

U.K.

Alta.

U.S.

0 20 40 60 80 100 120 140

A B C D

Sources: Employment and Social Development Canada; UN International Labour Organization; UK Office for National Statistics; Statistics Norway; The Conference Board of Canada.


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Unions are a prevalent component of the labour force in Newfoundland

and Labrador. The unionization rate, 38 per cent, was the highest in

the country in 2013.28 But higher unionization rates do not necessarily

result in a greater incidence of strikes. At 55 per cent, the unionization

rate in Norway is higher than in Newfoundland and Labrador,29 yet

Norway experiences fewer days not worked due to strikes and lockouts.

Norway’s labour system model is “characterised by strong employers’

and workers’ organizations and by close cooperation between the

government, employers’ associations and trade unions, as well as by

strong co-determination and participation at the company level.”30 There

are strict rules regarding industrial action and most disputes are resolved

through mediation. Therefore, unionization alone does not necessarily

impact competitiveness.

The age structure of a population largely determines the current and

future availability of workers. Additionally, an aging population can

result in high levels of retirement and, with it, a loss of knowledgeable

and skilled workers. Population aging is a significant challenge for

Newfoundland and Labrador; the province currently has the highest

proportion of people aged 65 and older in the country. The indicator,

“proportion of the population aged 65 and older by 2025,” was chosen

to benchmark the stress that aging will put on the labour market over the

next 10 years.

By 2025, Newfoundland and Labrador will have the highest proportion of

the population (compared to its competitors) aged 65 and older, earning

the province a “D” on the indicator. (See Chart 37.) Almost 27 per cent of

the province’s population will be 65 and older within the next 10 years.

This could make it much more difficult to compete with Alberta and

Saskatchewan, which have much younger populations. Tapping into

Newfoundland and Labrador’s existing labour force for skilled workers

will be an ongoing challenge.


29 oeCD, Statextracts.

30 Løken and Stokke, Labour Relations in Norway.

By 2025, Newfoundland and Labrador will have the highest proportion of the population aged 65 and older compared to its competitors.




When there is a lack of people to draw from to meet the needs of the

economy, migration can be a good source to make up the difference.

Net migration, both international and interprovincial, was chosen

as a benchmark indicator to gauge a region’s ability to attract and

retain people.

Newfoundland and Labrador has a long history of negative net migration,

with thousands of people leaving the province every year, mostly for

other provinces within Canada. The province has recently become more

successful in stemming these losses and has even been able to attract

back residents who had previously left. Despite these successes, the

province ranks low on the migration indicator, earning a “D” grade and

placing 8th out of 10 on the list of competitors. (See Chart 38.)

Chart 37Population Aged 65+ by 2025(percentage of the population aged 65 and over in 2025)

N.L.

N.B.

N.S.

Que.

U.K.

Norway

U.S.

Sask.

Alta.

14 16 18 20 22 24 26 28

A B C D

Sources: World Bank Health, Nutrition and Population Statistics for international forecasts; The Conference Board of Canada for provincial forecasts.


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Newfoundland and Labrador attracted 1.9 net new migrants for every

1,000 residents, on average, over the latest three years (2011–13).

meanwhile, Alberta attracted tenfold that number of migrants, earning

top spot on the list of competitors. only two regions ranked lower

than Newfoundland and Labrador on the indicator—Nova Scotia and

New Brunswick; they experienced negative net migration over the

same period.

Business and Policy Environment

The availability and efficiency of human and physical capital affects

labour productivity, but so do national and provincial business policy

environments in which firms operate. There are seven indicators

benchmarked to evaluate the business and policy competitiveness.

(See Table 11.)

Chart 38Newfoundland and Labrador Attracts Fewer Migrants, 2011–13 Average(net migration per 1,000 residents, 2011–13 average)

N.S.N.B.N.L.U.K.Que.

TexasNorway

Sask.N. Dakota

Alta.

–2 0 42 6 8 10 12 14 16 18 20 22

A B C D

Sources: Statistics Canada; U.S. Census Bureau; Statistics Norway; UK Office for National Statistics; The Conference Board of Canada.




Table 11Business and Policy Environment Indicators Summary



Provincial corporate income taxes – 8/10 provinces

marginal effective tax rate on capital A 3/9*

Taxes levied on businesses A 3/9**

Statutory labour costs B 5/9**

Transportation costs D 9/9**

Utility costs D 7/9**

Net provincial debt – 5/10 provinces

*due to data availability, Texas and North Dakota data replaced with U.S. national data **no Norwegian data available for four indicators Sources: OECD; Canada Revenue Agency; KPMG; Statistics Canada; U.S. Bureau of Economic Accounts; Employment and Social Development Canada; UN International Labour Organization; UK Office for National Statistics; Statistics Norway; University of Calgary School of Public Policy; The Conference Board of Canada.

Tax rates are one of the many factors that businesses consider when

choosing where to set up operations. Tax competitiveness is increasingly

relevant given capital mobility in a globalized economy. This report finds

that, while published tax rates are high in Newfoundland and Labrador,

the tax burden of businesses in the province is actually low when tax

credits are taken into account. A tax system rife with credits can lead to

unwanted market distortions and inefficiencies that are discussed in the

next chapter.

To assess business competitiveness, this report focuses on taxes paid

by businesses. Personal taxes do not affect investment.31 A natural

indicator choice for benchmarking competitiveness is the published

provincial corporate income tax rates. Newfoundland and Labrador has a

general corporate tax rate of 14 per cent, placing 8th out of 10 provinces

in terms of competitiveness. (See Chart 39.)

31 Chen and mintz, “2013 Annual Global Tax Competitiveness Ranking.”


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however, posted tax rates are only a small part of the story. Tax

credits and subsidies play a large role in attracting and promoting

businesses, and Statistics Canada data on actual taxes and transfers

paid in Newfoundland and Labrador showed a very different story. The

calculations in Chart 40 estimate an implicit corporate tax rate by taking

the direct taxes paid by corporations, net of transfers to businesses, as a

percentage of pre-tax corporate profits. This is based on actual amounts

paid over 2005–09 (the latest years of data available), not on posted

rates. When government transfers and credits are taken into account,

Newfoundland and Labrador has competitive tax rates, but these are

achieved in a very inefficient way.

Corporate taxes are an important determinant of competitiveness, but

there are many other taxes that businesses pay. University of Calgary

researchers publish an annual study on the marginal effective tax

rate (meTR) on corporate investment across provinces and nations.32

The authors focus on corporate investment (i.e., tax impact of capital

investment as a portion of the cost of capital) because they identify it

32 Ibid.

Chart 39Posted Corporate Income Taxes, 2014(tax rate for large corporations)

P.E.I.N.S.N.L.N.B.Man.

Sask.Que.Ont.B.C.Alta.

6 8 10 12 14 16 18


Sources: KPMG; The Conference Board of Canada.




as an important contributor to productivity enhancements and global

competitiveness: “When all non-tax considerations are equal, an investor

will invest in the sector or geographic location where the meTR is

lowest. It is to this extent that meTR provides a gauge for business tax

competitiveness among different tax jurisdictions.”33 Research shows that

a 1 per cent increase in the meTR results in a 1.18 per cent decrease in

foreign direct investment as a share of GDP.34 This measure of meTR

includes corporate income taxes, sales taxes on capital purchases, and

other capital-related taxes. Importantly, the meTR takes into account all

tax credits and deductions.

Newfoundland and Labrador ranks 3rd and scores an “A” on the meTR

on capital. (See Chart 41.) A value-added provincial sales tax (i.e., the

harmonized sales tax, or hST) and the elimination of capital taxes have

both contributed positively to the province’s competitive meTR position.

33 Ibid.

34 Krzepkowski, “marginal Versus Average effective Tax Rates.”

Chart 40Implicit Corporate Income Tax Rates, 2005–09 Average(net transfers from businesses to government as a percentage of pre-tax business profits)

P.E.I.Sask.Man.N.L.N.B.Que.B.C.N.S.Alta.Ont.

0 5 10 15 20 25 30




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But the largest determinant of the province’s competitive position is

the Atlantic Investment Tax Credit (AITC), implemented by the federal

government in 2010.

The AITC supports investments in new buildings, machinery, and

equipment in Atlantic Canada within the farming, fishing, logging,

manufacturing, and processing sectors (oil, gas, and mining activities

were initially eligible for the credit but are being phased out).35 Chen

and mintz found that the four Atlantic provinces had the most distorted

tax structures due to the combined effects of the AITC and higher-than-

average corporate income taxes.36

Along with the AITC, Newfoundland and Labrador’s corporate tax base

is further distorted by its two-tiered corporate income tax rates of 5 per

cent for manufacturing industries and 14 per cent for all other industries.

Distortions in the tax system can lead to a misallocation of resources

35 Canada Revenue Agency, Atlantic Investment Tax Credit.


Chart 41Marginal Effective Tax Rate on Capital, 2013(per cent)

U.S.

U.K.

Norway

Sask.

Alta.

Que.

N.L.

N.S.

N.B.

0 5 10 15 20 25 30 35 40

A B C D

Sources: University of Calgary School of Public Policy; The Conference Board of Canada.




within the economy, potentially reducing productivity by allocating

resources to sectors that are not necessarily the most productive

or profitable.

The next indicator allows us to broaden our analysis to include all taxes

paid by businesses (including property, payroll, and other taxes). Again,

this indicator captures the actual taxes paid, not posted rates; therefore,

they take into account government subsidies and tax credits. KPmG’s

Total Tax Index (TTI) creates hypothetical standardized businesses

in jurisdictions around the world and calculates the amount of taxes

that would be paid in each region based on local tax rates and local

business costs as of January 1, 2014. Taxes used in the calculation are

national, regional, and local taxes including corporate income taxes,

other corporate taxes (including capital taxes, sales taxes, property

taxes, miscellaneous local business taxes), and statutory labour costs

(representing the employer portion of required pension, unemployment,

medical, workplace injury, and other payroll-based taxes).37 KPmG’s

TTI measure estimates taxes faced by businesses located in major

cities. The regional indices used in the TTI benchmarking indicator

use an average of all major cities within the specified jurisdiction. For

Newfoundland and Labrador, only one city—St. John’s—has a reported

TTI. Therefore, the TTI represents all taxes paid by a typical business

based in St. John’s.

The TTI is indexed against the U.S., whose TTI is equal to 100. Values

lower than 100 are interpreted as lower taxes paid than are paid in the

United States. TTI calculations by province and state take an unweighted

average of the cities within the regions included in the KPmG study.38

All Canadian provinces earn an “A” on the TTI indicator. (See Chart 42.)

In fact, Canada as a whole had the lowest TTI out of the 10 countries

studied in the KPmG report, with the lowest corporate income taxes and

the lowest statutory labour costs.39 Newfoundland and Labrador ranks

37 KPmG, Competitive Alternatives Special Report.

38 For the list of participating cities in each region, see the KPmG report.


All Canadian provinces earn an “A” on the Total Tax Index indicator.


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3rd out of the 9 competitors, behind only Alberta and New Brunswick.

The low corporate income taxes paid in Newfoundland and Labrador are

due to the large tax credits and subsidies, despite high posted corporate

tax rates.

employer labour cost considerations are an important factor for

businesses when they are deciding where to locate.40 Some 60 per cent

of Newfoundland and Labrador’s taxes paid go to statutory labour costs

(payroll taxes and other payroll charges). only quebec has a higher

proportion of its TTI (66 per cent) going to statutory labour costs.41

(See Chart 43.) Because such a high proportion of the taxes paid by

Newfoundland and Labrador’s businesses go to statutory labour costs,

there is little room for the government to adjust other corporate taxes

without impacting the province’s total tax competitiveness.

40 Gunderson, “The Impact of high Workers’ Compensation Premiums.”


Chart 42Total Tax Index, 2014(total taxes paid by corporations, net of subsidies and credits; U.S. = 100)

Texas

N. Dakota

U.K.

Que.

Sask.

N.S.

N.L.

N.B.

Alta.

0 10 20 30 40 50 60 70 80 90 100

A B C D





high statutory labour costs (i.e., payroll taxes) contribute negatively to

these cost considerations. Newfoundland and Labrador ranks 5th out

of 9 on the next indicator, statutory labour costs for major cities in each

region, and earns a “B.” (See Chart 44.) The province has the highest

effective statutory cost rates of all the provinces except for quebec.

While the breakdowns between types of employer-paid labour costs

are not available, Dr. Gunderson calculated that Newfoundland and

Labrador has had the highest workers’ compensation assessment

rates of all the provinces since 1993.42 he found that Alberta’s workers’

compensation assessment rate was less than half of Newfoundland and

Labrador’s rate.

Payroll costs and taxes are an important determinant of business

competitiveness, but there are other costs that impact competitiveness.

Transportation and utility costs are the next indicators benchmarked in

this report. They are based on the same KPmG study as the TTI and

statutory labour costs described above.

42 Gunderson, “The Impact of high Workers’ Compensation Premiums.”

Chart 43Total Effective Tax Rate, by Type of Tax Paid, 2014(total effective tax rate as a proportion of standardized net income, per cent)

Texas

N. Dakota

U.K.

Que.

Sask.

N.S.

N.L.

N.B.

Alta.

0 10 20 30 40 50 60 70

Statutory labour costs

Corporate income taxes

Other corporate taxes



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Transportation costs can account for a substantial portion of business

costs. We have seen that Newfoundland and Labrador has aging

transportation infrastructure, but the province is also remote and far from

markets. These factors result in Newfoundland and Labrador’s having

the highest transportation costs of its competitors. (Transportation costs

are calculated for typical corporations in major cities, St. John’s in the

case of Newfoundland and Labrador.) (See Chart 45.)

The second (non-tax) business cost benchmarked is electric and gas

utilities. Newfoundland and Labrador ranks 7th out of 9 competitors

and scores a “D.” (See Chart 46.) Spending on gas utilities in particular

is much higher in Newfoundland and Labrador, while spending on

electricity is in line with the average spending among competitors.

Government fiscal policies can impact economic growth. high net

government debt as a proportion of GDP can result in less money

being available for the government to support productivity- and growth-

enhancing programs and investments. (The government’s ability to take

on more debt or pay down debt is more heavily influenced by GDP than

population, hence the choice of the debt-to-GDP indicator over debt

Chart 44Employer-Paid Statutory Labour Cost Rates, 2014(statutory labour costs as a percentage of standardized net income before income taxes)

Que.

U.K.

Texas

N. Dakota

N.L.

N.S.

Sask.

Alta.

N.B.

5 10 15 20 25

A B C D





Chart 45Transportation Costs, 2014(surface and air transportation costs for a representative corporation in major cities, US$ millions)

N.L.

Sask.

N.S.

N. Dakota

Alta.

N.B.

U.K.

Que.

Texas

1,000 1,200 1,400 1,600 1,800 2,000

A B C D


Chart 46Utility Costs, 2014(electricity and gas costs for a representative corporation in major cities, 10-year horizon starting in 2014, US$ 000s)

U.K.

N.S.

N.L.

Alta.

N.B.

Que.

Sask.

N. Dakota

Texas

0 50 100 150 200 250 300 350 400

A B C D



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per capita.) moreover, high debt levels can be viewed as a future tax

burden by businesses and households. Several studies have drawn a

link between government debt and economic growth. An International

monetary Fund study estimates that a 10 per cent increase in the

debt-to-GDP ratio results in a slowdown in annual GDP of around

0.2 percentage points per year.43

Newfoundland and Labrador’s provincial net debt as a proportion of GDP

ranks in the middle of the pack, 5th out of 10. (See Chart 47.) (Public

debt is difficult to compare across provinces, states, and nations, so the

analysis was limited to the provinces.) The province’s net debt accounts

for almost one-quarter of GDP; compare this with the resource-rich

Prairie provinces that have close to no debt.

43 Kumar and Woo, “Public Debt and Growth.”

Chart 47Provincial Net Debt to GDP, 2013–14(net provincial debt as a percentage of GDP)

Que.Ont.

P.E.I.N.S.N.B.N.L.B.C.

Sask.Man.Alta.

–10 –5 0 5 10 15 20 25 30 35 40 45 50 55


Sources: Finance Canada; provincial budgets; Statistics Canada; The Conference Board of Canada.



• Innovation is a key factor in the province’s future prosperity. Increased competitive forces lead to new ideas, improved business organization, and innovative production procedures. Lowering interprovincial barriers can increase opportunities in new markets and government procurement with an innovation focus can support local business innovation.

• Fiscal policies need to be efficient and less distortive. Local businesses face hundreds of “boutique” tax credits that increase compliance time and lead to inefficient allocation of investments.

• The labour shortages in the province will worsen as the population ages rapidly. Policies to boost immigration would help broaden the labour pool, as would retaining older workers and better aligning education and skills development with labour market needs.

• The current fiscal situation is not sustainable in the longer term. Day-to-day program spending should rely more on other sources of revenue than on volatile resource royalties and therefore should be reduced, especially in provincial public administration. In the future, more resource revenues need to be used to pay down debt and to contribute to a sovereign wealth fund instead of being used to meet the day-to-day requirements of government programs.

CHAPTER 4

Challenges and Opportunities

Chapter Summary


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An effective productivity strategy for Newfoundland and Labrador must focus on policy levers that governments and businesses can control or influence. The Newfoundland and Labrador economy is reliant on the resource sector and is a price taker on international markets; it must recognize global risks and be prepared to mitigate or adapt to developments as they occur.

Newfoundland and Labrador has experienced tremendous economic

and productivity growth over the past 15 years. But, when oil production

peaked in 2007, labour productivity and GDP growth peaked along with

it. The challenge now is to regain the momentum by broadening the

economic focus to other sectors of the economy and by strengthening

the building blocks of business competitiveness:

• innovation—enhancing the development and adoption of new products

and processes;

• investment—building the stock and quality of physical capital;

• human capital—enriching the province’s labour force;

• business and policy environment—developing competitive, efficient, and

fiscally prudent policies.

Policies to Boost Innovation

The results of the benchmarking analysis indicated a poor performance

in innovation by Newfoundland and Labrador. Compared with its

competitors, the organizations within the province do not file many

patents or spend as much money on research and development

(R&D). But innovation is not just implementing radical new ideas and

breakthroughs. Innovation includes incrementally improving processes

to add to or sustain the value of products and services, or to enhance




the efficiency and effectiveness of existing business processes.1 These

incremental changes are difficult to measure, but they are no less

important. (See “Definition of Innovation.”) Newfoundland and Labrador’s

industries would benefit from improvements to support all types of

innovation, whether big or small.

Despite many years of vouchers and tax credit policies to stimulate R&D

spending, Newfoundland and Labrador’s R&D spending as a share of

the economy is lagging compared with its competitors. (See Chart 48.) It

is time for the province to take a broader and more holistic approach to

innovation since tax credits alone do not appear to boost innovation to

desired levels.


Chart 48Business Sector R&D Spending as a Proportion of GDP(per cent; competitor average is unweighted)

2001 02 03 04 05 06 07 08 09 10 11

0.0

0.2

0.4

0.6

0.8

1.0

Newfoundland and Labrador Competitor average



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Definition of Innovation

“A process through which economic or social value is extracted from

knowledge—through the creation, diffusion, and transformation of ideas—

to produce new or improved products, services, processes, strategies,

or capabilities.”2

Canadian business leaders seem to take on activities and investment

decisions that are too narrow and miss out on other opportunities to

broaden their presence on international value chains (e.g., production,

marketing, design, sales, and distribution).3 Canadian businesses must

move up the value chains and specialize in knowledge-intensive, high-

value-added goods and services. For example, a study on Alberta’s

oil extraction industry identified opportunities for businesses in the

province to leverage their experience and become international leaders

in the oilfield services industry.4 Canada is already a net exporter of

oilfield services capital and could build on other areas of innovation.

Newfoundland and Labrador businesses have developed specialized

ocean technology knowledge and have begun tapping into international

offshore developments, defence systems, and other functions, in

countries ranging from Brazil to South Korea to Australia.5 This may be

an area to explore to move Newfoundland and Labrador farther up global

value chains.

Enhance Innovation Traits in the School SystemsInnovation starts with skills, attitudes, and behaviours of individuals

and teams within the workforce, and innovation policies should start

with enhancing these traits. Research by the Conference Board has

2 The Conference Board of Canada, How Canada Performs 2013.

3 Watt and edge, Business Leaders’ Perspectives.

4 Arcand, Burt, and Crawford, Fuel for Thought.

5 Fitzpatrick, “Rutter Receives Federal Support for Tech export.”




recommended starting with children, youth, and educators in the

primary, secondary, and tertiary (college and university) school systems.

experimental and applied learning is encouraged because innovation

is best learned by hands-on experiences, not just instruction. This may

involve problem-solving across disciplines or supporting public-private

partnerships.6 Tertiary schools are in the right position to connect

students with successful entrepreneurs, innovators, and leaders. This

would allow students to take the theoretical knowledge they have learned

and apply it in real-world contexts. Students are not the only ones to

benefit from learning how theory can be applied; business leaders

can benefit from new innovations and ideas coming from the students,

as well as from access to technologies, facilities and equipment,

and funding.7

In fact, forming a link between universities and businesses has been

identified as a key determinant for the commercialization of innovation

in an economy. A survey of 29 businesses and organizations that had

worked with one or more ontario colleges on applied research projects

found that 69 per cent of all collaborations led to the development of

new products or services (or were expected to in the future).8 other

benefits to collaboration included reductions in the time to market of new

or improved products, observable improvements to a good or service,

infiltrating new markets and connecting to new customers, and improved

strategic and business planning. moreover, nearly 80 per cent of these

collaborations experienced (or expected to experience) increased sales

and revenues for the firm.

With only modest resources and within a short time, ontario colleges

demonstrated that their applied research services can stimulate and

accelerate the innovation activities of ontario-based firms. Newfoundland

and Labrador universities and colleges already conduct applied research

for commercial purposes, and some funding is available for these


7 haimowitz and munro, Innovation Catalysts and Accelerators.

8 Ibid.

Newfoundland and Labrador universities and colleges already conduct applied research for commercial purposes, and some funding is available for these collaborations.


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collaborations under the Atlantic Canada opportunities Agency’s (ACoA)

Atlantic Innovation Fund (AIT). But more can be done to link individual

businesses, including small and medium-sized enterprises (Smes),

with innovators at public research institutions. A federal review of

government programs that promote these links (including, but not limited

to, ACoA’s AIT) identified several gaps in the programming and made

recommendations. These include framing objectives around a “demand

pull” model that emphasizes business innovation objectives rather than a

“research push” from public institutions, and helping companies acquire

the risk capital they need to embark on such programs.9

Increase Competition to Foster Innovationmuch of the innovation policy literature focuses on the link between

competition and innovation.10 The thinking is that greater competition

will force innovation, which in turn increases productivity. A report

from the Council of Canadian Academies’ expert Panel on Business

Innovation found that Canadian sectors with exposure to international

markets had the same levels of R&D intensity and innovation as their

international counterparts.11 meanwhile, sectors in which competition

is curtailed and foreign entrants impeded had much lower levels of

innovation. empirical research on trade barriers by The Conference

Board of Canada found that tariff and non-tariff barriers to competition

have a negative effect on productivity for a core group of 16 industries in

the primary and manufacturing sectors of the economy; it recommends

lowering barriers in the tradable goods sector to narrow the productivity

gap with the U.S.12 The Institute for Competitiveness & Prosperity

found that protected industries do not generally produce global leaders

9 expert Review Panel on Research and Development, Innovation Canada.

10 Jenkins, “A Simple Solution to Canada’s Innovation Problem.”

11 Council of Canadian Academies, Innovation and Business Strategy.

12 Darby and others, Death by a Thousand Paper Cuts.




(companies that generate more than $100 million in annual revenue).13

The Institute also recommends innovation policies that balance support

with competitive pressure.

Increasing competition comes in many forms and does not have to cause

undue strain on Newfoundland and Labrador businesses. Increasing

government procurement for innovative products and services is one

way to increase competition. Industry Canada’s expert Review Panel

on Research and Development recommended making business

innovation one of the core objectives of government procurement—a

big change from the current focus on lowest cost.14 Indeed, this idea is

not revolutionary and many other governments aim to promote value-

added to procurement; the lack of government innovation procurement

strategies has been identified as a major contributor to the Canada–U.S.

productivity gap because the U.S. government has a larger appetite and

budget for technological innovations and regularly promotes product

innovation through procurement.15 The World economic Forum also

identified this as an area of current shortcoming for Canada, ranking the

country 48th on fostering innovation through government procurement.16

Norway and the U.S.—two of Newfoundland and Labrador’s

competitors—ranked in the top 15 on the indicator, while the U.K. also

ranked ahead of Canada.

Lowering interprovincial and international trade barriers would not only

breed more competition; it would also allow the province’s industries

to integrate into global and national supply chains and expand their

market reach for goods and services. Several international trade

deals are currently being negotiated by the federal and provincial

governments (including the Comprehensive economic and Trade

Agreement [CeTA] with the european Union) and these will help broaden

competition outside of North America. one of the key provisions in these

13 Institute for Competitiveness & Prosperity, Canada’s Innovation Imperative.

14 expert Review Panel on Research and Development, Innovation Canada.

15 munro, From Perception to Performance.


Industry Canada’s expert Review Panel on Research and Development recommended making business innovation one of the core objectives of government procurement.


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next-generation trade deals is labour mobility and investment protection.

This deal would facilitate increased opportunities for Newfoundland and

Labrador businesses in europe, including engineering, marine, and oil

and gas extraction sectors.

Interprovincial trade barriers reduce competition across Canada, create

inefficient labour markets, and limit the size and reach of businesses.

Sometimes the barriers are so severe that it is easier to integrate into

global supply chains than supply chains in different provinces. Barriers

include overlapping regulations, licensing, and government procurement

preferences that favour regional players. Research by The Conference

Board of Canada noted that “supply chains across provincial borders

face obstacles that global supply chains have eliminated. In the age

of global mobility, it makes no sense to add degrees of difficulty to

the movement of people, goods, and services from one province to

another.”17 many organizations have repeatedly recommended fully

implementing the 1995 Agreement on Internal Trade, which aims

“to reduce and eliminate, to the extent possible, barriers to the free

movement of persons, goods, services, and investment within Canada

and to establish an open, efficient, and stable domestic market.”18

Reducing regulatory barriers and increasing labour mobility and

credential recognition among Newfoundland and Labrador and other

provinces would not only open up the province to increased competition

and, with it, productivity-enhancing benefits; it would also allow firms to

focus on better ways to conduct business rather than on how to comply

with overlapping regulations in different provinces. Businesses could

then scale up their operations because they could reach new markets,

and scaling up would result in increased investments and supply chains

across provincial boundaries.19 moreover, having one national standard

for regulations may attract more international investment to the country

and to Newfoundland and Labrador.

17 The Conference Board of Canada, Mission Possible Executive Summary.

18 Agreement on Internal Trade.

19 The Conference Board of Canada, Western Canada.

having one national standard for regulations may attract more international investment to the country and to Newfoundland and Labrador.




Policies to Support and Expand Investment

We have seen that competitiveness and labour productivity go hand in

hand. Investment in structures, machinery and equipment, and public

infrastructure enables workers to produce more output for each hour

of work; strategic investments therefore contribute directly to labour

productivity. Investing in structures and machinery and equipment can

also lower unit labour costs as firms become more productive. This

allows goods sold on international markets to be more competitive and

the businesses more sustainable.

The main driver of investment is the expected return on capital. Several

factors influence returns on capital (global demand and supply, interest

rates, economic stability, exchange rates, etc.), many of which are

outside the control of policy-makers. however, there are a few policy

levers that can help support and attract investment. moreover, a fair and

efficient tax system with competitive rates will help to allocate investment

to the most productive uses within the economy.

Provincial and federal governments have made a tremendous effort

to reduce their taxes on capital in Newfoundland and Labrador. The

province was an early adopter of the harmonized sales tax (hST), which

is a value-added tax like the federal general sales tax (GST). The hST

supports investment by allowing for tax deductions on capital purchases

so businesses can put more money toward purchasing the latest

technologies that spur innovation and productivity gains. The province

also charges no capital taxes on non-financial corporations; capital

taxes are deemed one of the most damaging taxes to investment and

prosperity so it is important they are not charged in any province. While

acknowledging these encouraging reductions to capital taxes, more

improvements can be made to the tax system in Newfoundland and

Labrador to encourage investment.


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Create an Equitable and Efficient Tax System for CapitalThe economic literature has long supported the idea that a larger tax

base that is taxed at a lower overall rate is better for economic growth

than a smaller tax base with targeted tax relief for certain industries

or sectors.20 Not only are the administration and compliance costs

more efficient since the same rate applies to every sector but, more

importantly, a broader tax base lessens distortions because firms will

place investments in areas where they will get the biggest returns, i.e.,

they will invest in the most productive areas of the economy.

Newfoundland and Labrador currently has one of the most distortive tax

systems in Canada.21 To start with, the province has separate corporate

income tax rates for the manufacturing sector (5 per cent) and a much

higher rate for the other sectors (14 per cent) that is one of the highest

in the country. (See “Newfoundland and Labrador’s manufacturing

Industry.”) In theory, under this system, there is incentive for capital

allocation to be distorted toward the manufacturing industry, which is less

productive than the overall economy. (See Chart 49.)

20 oeCD, Tax Policy Reform and Economic Growth.


Chart 49Labour Productivity by Sector, 2007–13 Average(output per hour worked, 2007 $)

Total economy

Other primary industries

Mining (incl. oil and gas)

Utilities

Construction

Manufacturing

Business services

0 100 200 300 400 500 600 700 800 900





oeCD empirical research found that removing targeted sector-specific

tax relief (with the exception of R&D credits) and levelling the tax rates

across sectors can increase investment in various ways: by providing

greater certainty and predictability for firms; by leaving more money

available for firms to purchase productive-enhancing machinery and

equipment; and by attracting inbound foreign direct investment (FDI).22

Attracting inbound FDI has also been found to increase the productivity

of resident firms, since there is increased competition and innovation.

But businesses in Newfoundland and Labrador face a complex tax

system. This increases costs for both governments and the businesses

that must spend time and resources to comply with the complicated

structure. These resources could instead be put toward more productive

uses under a streamlined tax system.

Newfoundland and Labrador’s Manufacturing Industry

Newfoundland and Labrador manufactures a variety of goods, with

manufacturing shipments totalling more than $500 million each month. more

than 90 per cent of all the province’s manufacturing shipments are non-durable

goods, mainly petroleum and paper products. however, data are suppressed by

Statistics Canada for these two sectors due to data confidentiality, so it is not

possible to track the performance of each sector on a monthly basis.

Food manufacturing is the largest subsector where data are available; it has

accounted for one-quarter of all manufacturing shipments since the recession.

Food manufacturing includes seafood, fruit and vegetables, grain, meat,

and others.

To get an idea of the breadth of distortions that these preferential tax

treatments have on the economy, a study by the University of Calgary

examined the current marginal effective tax rates on capital (meTRs)

22 oeCD, Tax Policy Reform and Economic Growth.


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by industry and by province.23 The study found that the most distortive

tax systems were found in the four Atlantic provinces, while the least

distortive was Alberta’s. This was evidenced by negative meTRs for

some Newfoundland and Labrador industries while other industries have

high rates. (See Chart 50.)

The results show preferential tax treatment for forestry and

manufacturing industries. (A negative meTR indicates a tax savings that

can be used to offset tax liability associated with investment.) Authors

of the University of Calgary study attribute most of Newfoundland and

Labrador’s tax distortion to the federal government’s Atlantic Investment

Tax Credit (AITC). The AITC was introduced during the recession to

support investment in new buildings, machinery, and equipment in

Atlantic Canada in the farming, fishing, logging, manufacturing, and

processing sectors (oil, gas, and mining activities were initially eligible


Chart 50METR on Capital Investment, by Industry, 2013(marginal effective tax rates on capital, per cent)

Aggregate

Other services

Communication

Transportation

Retail

Wholesale

Manufacturing

Construction

Forestry

–60 –50 –40 –30 –20 –10 0 10 20 30

Newfoundland and Labrador Alberta

Sources: University of Calgary School of Public Policy; The Conference Board of Canada.




for the credit but are being phased out).24 Deductions under AITC distort

Newfoundland and Labrador’s tax base by favouring some sectors over

others. Notice in Chart 50 that the meTRs are higher in Newfoundland

and Labrador than in Alberta in all industries with the notable exceptions

of forestry and manufacturing.

In summary, Newfoundland and Labrador and the federal government

can level the playing field by creating an equitable and efficient tax

system. This means broadening the tax base by eliminating or reducing

preferential tax treatment for certain sectors of the economy and then

using these additional revenues to reduce the overall corporate tax rate.

Compliance costs would decrease and investments would be allocated

to more efficient uses.

Boost Productivity by Investing in Public InfrastructureThe link between public infrastructure and productivity has been studied

extensively. enhanced transportation networks (highways, bridges, ports,

rail, air, etc.) can shorten the time it takes to move goods to markets.

These networks also allow people to access employment in other

communities with shorter commute times. quality health and education

facilities support the development and maintenance of human capital.

Utilities, including electricity, water, and sewage, all support business

activities, making it less costly to open a plant in a location where

these services are available. An extensive telecommunications network

connects people between communities and with the world, ensuring

businesses have access to all information required to make decisions

and to coordinate logistical needs in a timely manner.

Several studies have attempted to quantify the link between

infrastructure and productivity in Canada. A study published in the

Canadian Journal of Economics found that a 1 per cent increase in

Canadian public infrastructure investment could boost private output by

24 Canada Revenue Agency, Atlantic Investment Tax Credit.


www.cboc.ca/ip



0.4 per cent.25 more recently, research by Statistics Canada found that

public capital contributed 0.2 percentage points to labour productivity per

year over 1962–2006.26

The World economic Forum ranked infrastructure second only to legal

and administrative institutions in its pillars of competitiveness.27 Its

2014–15 report on global competitiveness describes the importance

of infrastructure:

extensive and efficient infrastructure is critical for ensuring the

effective functioning of the economy, as it is an important factor

in determining the location of economic activity and the kinds

of activities or sectors that can develop within a country. Well-

developed infrastructure reduces the effect of distance between

regions, integrating the national market and connecting it at low

cost to markets in other countries and regions. In addition, the

quality and extensiveness of infrastructure networks significantly

impact economic growth and reduce income inequalities and

poverty in a variety of ways.28

From the benchmarking results, we have seen that Newfoundland and

Labrador has some of the oldest public infrastructure in the country

(16.7 years on average). moreover, the proportion of GDP that goes

toward investments in public infrastructure is one of the lowest in

the country. Given that the connection between public capital and

productivity has been empirically documented, these lower levels

of government investment in infrastructure put the province at a

disadvantage. If government capital investment in Newfoundland and

Labrador as a proportion of GDP had matched the national average over

2004–13, the province would have invested an additional $145 million per

year. This would have amounted to $1.5 billion of additional investment.

25 Wylie, “Infrastructure and Canadian economic Growth 1946–1991.”

26 Gu and macdonald, “The Impact of Public Infrastructure.”


28 Ibid.

Given the connection between public capital and productivity, these lower levels of government investment in infrastructure put the province at a disadvantage.




The timing for infrastructure investment is important. In areas where

current needs are directly hindering economic advancement, projects

addressing these needs should be considered in a timely way. however,

large-scale public infrastructure projects can compete for labour in

an already tight market for construction-related trades and this must

be considered in the planning process. It is preferable to align large-

scale infrastructure developments with periods of low demand in the

private sector.

Policies to Strengthen the Labour Force

human capital is one of the most important building blocks of

productivity and competitiveness. A region’s resource endowment alone

cannot boost wealth unless its labour force is educated and skilled

enough to extract the resources effectively, and the labour market is

flexible enough to attract labour and match employers and employees

efficiently. We have seen from the benchmarking analysis that

Newfoundland and Labrador has a mixed performance on education and

skills and is not a top performer on labour market indicators.

The good news is that Newfoundland and Labrador’s secondary students

have adequate skills and complete community college programs at

rates similar to competitor averages. The province even has an above-

average number of graduates in science, math, computer science, and

engineering fields.

But labour market indicators in Newfoundland and Labrador

underperformed peer competitors. While there has been decent

employment growth (and with it, labour shortages29), the province

paradoxically still has low labour force participation and high

unemployment. moreover, the population is aging rapidly and

immigration is low and not meeting labour market needs.



www.cboc.ca/ip



We learned from our benchmarking results that Newfoundland and

Labrador has the oldest population of all competitors. The proportion of

the population aged 65 and older is expected to increase from its current

17 per cent to 27 per cent by 2025 and then to continue increasing to

reach 30 per cent by 2035.30 This phenomenon will squeeze the working-

age population economically, socially, and fiscally. moreover, current

skills shortages in the province will worsen as a large portion of the

labour force retires. The province must have a multi-pronged approach to

supporting the labour market during this transition period. Policies should

be implemented that:

• boost immigration and corresponding credential recognition;

• increase education levels and match skills training with labour

force needs;

• retain older workers in the workforce longer and engage under-

represented groups in the tightening labour force.

Boost Immigration and Corresponding Recognition of CredentialsWhile increasing the skills and qualifications of the resident labour

force is effective, it can take many years to see tangible results. A more

timely option to get the needed workers is through immigration. The

province can attract people from other provinces and other countries to

fill immediate labour skills gaps but also to help mitigate the long-term

effects of a rapidly aging population.

Despite labour pressures and accelerating wage growth in Newfoundland

and Labrador, its net migration has remained relatively low. The province

earned a “D” on the net migration indicator in the benchmarking analysis,

gaining only 2 migrants for every 1,000 residents in contrast to Alberta’s

20 migrants per 1,000 residents on average over 2011–13.





however, even this low performance is a big improvement for a province

that has spent much of its history losing more people than it gains

through immigration. (See Chart 51.) The province sustained five years

of positive net migration (more people moved to the province than

left the province) for the first time in recorded history over 2008–12.

Still, Newfoundlanders and Labradoreans—along with most other

Canadians—continue to be lured westward to Alberta. half of all out-

migrants from Newfoundland and Labrador in 2012 went to Alberta, and

one-quarter to ontario.31

Better employment prospects have lured some residents to

Newfoundland and Labrador in recent years, but migration needs to

be stronger to meet the employment and skills needs of the province.

Recognizing training and certification across provinces is strongly

recommended. The provinces have made some progress on that front,

31 Bendiner, Interprovincial Migration Shifts in Canada.

Chart 51Newfoundland and Labrador’s Net International and Interprovincial Migration(net migrants)

1961 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13–10,000

–8,000

–6,000

–4,000

–2,000

0

2,000

4,000

Interprovincial International



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including mutual recognition of qualifications for several trades under

the Red Seal program, which sets common standards to assess the

skills of tradespeople across Canada. The 2009 strengthening of the

Agreement on Internal Trade (AIT) to recognize occupational credentials

was also another sign of progress toward greater recognition. however,

the oeCD has highlighted the need for further work to be done in the

implementation of the AIT, stating that the dispute resolution mechanism

needs to be more accessible and timely.32 While agreements to

recognize apprenticeship training in Alberta and Newfoundland are an

important first step, it would be preferable to streamline the process

across the country.

historically, international migration has contributed very little to

population growth in Newfoundland and Labrador. however, the province

has been more successful in attracting international migrants in recent

years. Since 2008, the province has gained between 500 and 1,500 net

new international residents per year. This compares with an average

of 200 during the earlier years of the resource boom, during 1997 to

2007. A 2009 survey of newcomers to Newfoundland and Labrador

listed a high quality of life as the main reason why they settle in the

province, along with being close to family and friends. however, there

were several reasons why people decided not to stay, including lack

of job opportunities, difficult climate, discrimination, and the lack of a

multicultural environment.33

The Conference Board of Canada’s latest City Magnets study identified

St. John’s as one of the top-ranking six cities in Canada in terms of

characteristics that attract immigrants.34 The city was a top performer

in health care with a high ratio of doctors and specialists per person,

and was also a high performer in the environment section. however,

the city ranked low on the “society” category due to its lack of foreign-

born population, diversity, and multiculturalism. While St. John’s has

32 oeCD, Economic Surveys: Canada.

33 Gien and Law, Attracting and Retaining Immigrants.

34 The Conference Board of Canada, City Magnets III.

historically, international migration has contributed very little to population growth in Newfoundland and Labrador.




some of the best draws for immigrants, the province has not attracted

many immigrants. This implies the province could do better in selling the

attributes of the city that were rated highly in the City Magnets study.

Attracting migrants with diverse backgrounds can build a rich society,

and migrants with specific skills and qualifications matter most for

business competitiveness. The federal government’s immigration policies

have been targeting educated, wealthy immigrants, with about 60 per

cent of immigrants selected based on economic criteria.35 however,

these immigrants often struggle to have their credentials recognized

in Canadian society and end up working in jobs that require lower skill

levels than what they possess.

Regardless of skill levels, migration policies to date have not fully taken

into consideration the economic needs of Canada. That is, while they

have attracted wealthy, educated immigrants, they have not effectively

matched immigration specifically with labour market needs. Canada’s

new “express entry” immigration system, implemented in 2015, acts as

a type of job bank of workers possessing the qualifications identified

by government and businesses needed for positions facing the highest

labour pressures in Canada. If a company cannot find a qualifying

resident worker for a given position, they can hire directly from this job

bank. Unlike the Temporary Foreign Worker Program, the hiring of a

foreign worker through the express entry system will put that worker on

the track to full Canadian citizenship. In theory, this system may better

meet Newfoundland and Labrador’s skilled labour needs. engagement

by the provincial government and local business organizations will be

crucial to the success of the program.

Increase Education Levels and Match Skills and Education With Labour Market NeedsThere has been much anecdotal evidence confirming the presence

of a skills shortage in Newfoundland and Labrador. Wages have

been climbing at rates comparable with labour-crunched Alberta and

35 oeCD, Economic Surveys: Canada.


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Saskatchewan over the past 10 years. (See Chart 52.) Skilled trades

are in high demand and companies are working hard and spending

significant sums of money to lure the labour they require.36

high levels of unemployment in the face of labour shortages can in part

be explained by the historical economic structure of the province. The

prominence of fishing and seafood processing industries has resulted

in a high proportion of seasonal workers. however, incremental efforts

should be made to engage the seasonal workforce in other areas of

the economy.

Two of Newfoundland and Labrador’s high-needs sectors—mining and

construction—require skilled tradespeople to meet labour demands.

Unfortunately, the results of the benchmarking analysis revealed that

the apprenticeship completion in the province has been mediocre at

best. There have been some policy reforms in recent years but more


Chart 52Wages and Salaries(Index; 2004 = 100)

2004 05 06 07 08 09 10 11 12 13

90

100110

120

130

140

150

160

170

N.L.

Alta. N.B. N.S.

Que.Sask.





improvements can be made. Specifically, barriers exist when apprentices

move between provinces, and financial barriers are present during the

in-class portions of apprenticeship training.

In 2007, the Alberta and Newfoundland and Labrador governments

acknowledged the importance of transferability between provinces

and agreed that apprenticeship hours logged in one province would

be recognized in another. This agreement gives more flexibility

for apprentices training in Alberta who may want to relocate to

Newfoundland and Labrador. The next step is to have apprenticeship

training recognized nationwide as is the case in many other

developed nations.

The federal government has recognized the importance of providing

financial support to encourage apprenticeship training and completion.

They administer the Apprenticeship Job Creation Tax Credit for

businesses to claim 10 per cent of that apprentice’s salary (up to $2,000)

for every apprentice hired. moreover, the apprentices themselves are

eligible for up to $4,000, which includes grants during their training and

a cash grant of $2,000 upon completion.37 Loans are also available for

apprentices during the unpaid in-class portions of their programs.

Increasing the pace at which apprentices are trained has also been

on the policy radar in Newfoundland and Labrador. In 2012, it was

announced that each journeyperson in the province will be able to

train two apprentices at a time—up from one—in several construction

trades.38 But more could be done to engage potential apprentices to get

them interested in a career in the skilled trades. Alberta has programs

aimed at connecting high school students with potential apprenticeship

opportunities through scholarships and has also instituted an Aboriginal

apprenticeship program to engage this under-represented group.

37 Service Canada, Apprenticeship Grants.

38 CBC News, “New N.L. Apprentice Rules Target Worker Shortage.”

In 2007, the Alberta and Newfoundland and Labrador governments agreed that apprenticeship hours logged in one province would be recognized in another.


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Although the lack of skilled tradespeople has been prominently reported

in the media, higher education is also important for Newfoundland and

Labrador’s competitiveness. There has been growing evidence that a

university-educated workforce is associated with increased innovation

and ideas, as well as the capability of taking on risks and venturing

into new markets. The university completion rate in Newfoundland

and Labrador is the lowest across competitors. The province, despite

increasing university completion rates by 11 percentage points over

30 years, is still graduating the lowest proportion of university students of

all the competitors. It is somewhat puzzling that more potential students

are not entering university programs, given that the province has the

highest university earning premiums in the country and some of the

lowest tuition fees. In Newfoundland and Labrador, for every $100 in

wages that a high school graduate earns, a university graduate earns

$179. (See Chart 53.) (College graduates earn $129 for every $100 that

a high school graduate earns—also the highest in the country.) This

indicates a high demand for university graduates in the workforce.

Chart 53University Graduate Earnings for Every $100 Earned by High School Graduates, 2013($)

B.C.Man.Alta.

Ont.Sask.

Que.N.S.

P.E.I.N.B.

N.L.

100 110 120 130 140 150 160 170 180 190






Students need accurate and timely information on current labour market

needs to make informed decisions about their career futures. While

labour market information in Canada is detailed using international

standards, there is generally no requirement in Canada to provide this

information in schools, and career guidance is chronically underfunded.39

Getting this information to students is critical in a province that is

experiencing such rapid transformation. The structural shift of the

economy means that parents and other citizens did not require these

same skill sets when they were entering the labour force. They therefore

may not have a complete understanding of the opportunities available in

the economy and of the skills and education required to succeed in the

province’s transformed economy.

employers can upgrade the existing skills of the workforce by investing in

learning and development for their workers. Conference Board research

has shown that spending on training and development peaked in 1993

at $1,207 on average per employee.40 Spending has been gradually

declining since then; businesses spent only $705 per employee on

training and development in 2012–13. meanwhile, businesses in the U.S.

spend almost $400 more per employee and they do not suffer from the

same aging population pressures that Canada needs to address.

Retain and Engage Older Workers and Under-Represented GroupsWhile immigration may be the most viable long-term solution for

Newfoundland and Labrador’s aging demographic and labour shortage,

there are in the meantime some potential benefits from engaging older

and under-represented groups in the labour force. having older workers

remain in the labour force benefits not only the employers who need

workers, but also the province’s fiscal situation by prolonging workers’

payment of income tax and by shortening the time frame over which

retirement benefits will have to be paid.

39 Sharpe and qiao, The Role of Labour Market Information.

40 hall, Learning and Development Outlook 2014.


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We have seen in the benchmarking exercise that Newfoundland and

Labrador currently has the most rapidly aging population of all its

competitor regions, with almost one-third of its population forecast to be

age 65 or older by 2035.41 Right now, there are four working-aged people

(aged 15–64) for every retired-aged person (aged 65+). This ratio will

decline to just 1.8 working-age persons per retired-age person by 2035.

(See Chart 54.)

moreover, the labour force participation rate of older workers is currently

the lowest in Canada. This means that the population aged 55 and

older participates less in the labour force than in any other province in

Canada. one-third of Newfoundland and Labrador’s population aged 55

and older is in the workforce compared with 37 per cent nationwide.

A similar difference is reflected in the participation rates of workers

aged 65 and older. (See Chart 55.)


Chart 54Newfoundland and Labrador’s Population Age Groups,*2013–35(population, 000s)

2013 14 15f 16f 17f 18f 19f 20f 21f 22f 23f 24f 25f 26f 27f 28f 29f 30f 31f 32f 33f 34f 35f

15−64 65

050

100150200250300350400450500

f = forecast *forecast includes positive net migration of 385 people on average per year Sources: Statistics Canada; The Conference Board of Canada.




Different types of incentives can be used to engage the older workforce.

Financial incentives such as changing the retirement age at which

retirement benefits can be collected is one such example. The federal

government recently increased the retirement age to 67 to collect old

age security, but these changes will not come into effect until 2029. The

oeCD and other research organizations have recommended linking

retirement ages to life expectancy so that, as people live longer, they

remain in the workforce longer and are retired for a similar number of

years.42 however, Newfoundland and Labrador is already experiencing

some of the negative effects of population aging so a more timely

solution may be in order.

Workplaces can encourage part-time or casual working arrangements as

a replacement for traditional notions of retirement. A policy that allows

for phased-in retirement benefits for defined-benefit public pension

plans would set a standard. This would encourage older workers to stay

in the workforce a little longer and has already been implemented for

42 de la maisonneuve and others, “The economic Consequences of Ageing.”

Chart 55Newfoundland and Labrador’s Labour Force Participation of Older Age Cohorts(percentage of population engaged in the labour force, by age group)

1995 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

0

5

10

15

20

25

30

35

40

Canada 55+ Canada 65+ N.L. 65+N.L. 55+



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federal public servants and in most provincial governments, including

all of Newfoundland and Labrador’s comparator jurisdictions except

Nova Scotia.43

We have seen that participation in the labour force is very low

in Newfoundland and Labrador compared with its competitors.

The benchmarking analysis gave the province a “D” grade and

ranked it second to last after the United Kingdom. engaging under-

represented workers like women could boost human capital and

competitiveness in Newfoundland and Labrador. Similar to the total

workforce participation, female workforce participation is the lowest

in the country. (See Chart 56.) Government apprenticeship incentive

programs aimed at attracting more women into skilled trades could be

expanded and enhanced. quebec’s universal early childhood care and

education program, which subsidizes child care costs, has been credited

with increased participation by women in the labour force and increased

incomes of families as a result.44 other ways to enhance child care

include improving access, especially in rural areas.

43 mercer, Benefits Legislation in Canada 2013.

44 Gignac, “quebec’s Child Care Program.”

engaging underrepresented workers like women could boost competitiveness in Newfoundland and Labrador.

Chart 56Female Labour Force Participation Rate(percentage of female population engaged in the labour force)

1995 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

45

50

55

60

65

70

N.L.

N.S.

N.B. Sask.

Alta.Que.





The benchmarking measure indicates that labour relations in

Newfoundland and Labrador could be improved. A higher-than-average

number of days are lost to strikes and lockouts in the province. Again,

the province’s higher unionization rates do not tell the full story, since

there are other jurisdictions with high unionization rates but healthier

labour relations. many european models—including Norway’s—engage

all players (government, industry, and organized labour) continuously,

not just during the bargaining time. Alberta, Saskatchewan, and British

Columbia operate under different labour relations environments that

create more competition in the supply of labour than in Newfoundland

and Labrador. In Newfoundland and Labrador, employers generally work

with one umbrella union that represents all trades, reducing flexibility

in the supply of labour that may have implications for both productivity

and wages.

Policies for a More Competitive and Sustainable Fiscal Environment

After decades of deficits, reliance on equalization transfers from the

rest of Canada, and climbing debt levels, Newfoundland and Labrador’s

fiscal situation recently enjoyed a period of relative prosperity. The

development of the oil extraction industry brought billions of dollars

in revenues to the government, which in turn, lowered the net debt

and increased spending. however, debt levels began to climb again

in 2012–13 and the current environment of lower-priced oil is having a

negative impact on provincial coffers.

So where do we go from here? oil is a finite resource and the revenues

associated with it are just that—finite. oil extraction likely has already

peaked, but government expenditures keep growing. The province’s

fiscal health is already showing some weakness as the province slid into

a deficit position in 2012–13 and net debt began to climb. Additionally,

the fiscal balance will be gravely affected by the current environment of

lower oil prices. This situation is expected to become more serious in

the near future as the aging population will be increasingly dependent

on the government for health care services and pension incomes.


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The provincial government, therefore, needs to embark on a plan to

prioritize spending, lower debt, and plan for future fiscal sustainability.

equally important is the need for a collection of tax policies that together

lay the foundation of competitive prosperity and economic diversification.

Keep Debt in CheckThe benchmarking analysis showed the net debt position of

Newfoundland and Labrador (at 24 per cent of GDP) is in the middle of

the pack compared with provincial counterparts. however, many of the

comparator provinces, such as quebec and ontario, are facing dire fiscal

pressures so this comparison is not necessarily encouraging. moreover,

recent trends can affect competitiveness just as much as debt levels—

and net debt has recently begun to rise in the province.

Ten years ago, the province’s net debt stood at $12 billion, but the

government managed to bring the debt down below $8 billion using

oil revenues and $2 billion from the Atlantic Accord. (See Chart 57.)

(The Atlantic Accord was an agreement regarding temporary annual

transfers from the federal government over 2004–05 to 2011–12 to offset

reductions in provincial equalization payments due to increased offshore

resource revenues.) however, debt resumed its upward trajectory in

2012–13 and the situation is expected to worsen over the short term due

to the low price of oil and the provincial government’s dependence on

resource revenues plus unabated increases in program spending. In fact,

net debt is expected to reach $10.3 billion by the end of 2014–15 and the

government is forecasting deficits for the next five years.45

45 The Canadian Press, “Deficit in Newfoundland and Labrador Soars.”




Unfunded public sector pension liabilities currently account for the bulk

of net debt, but recent pension reforms are expected to help alleviate

the problem. In recent years, public sector employment has risen

tremendously and, combined with the impacts of an aging population,

will place additional demands on public sector pensions. Whether the

problem of unfunded pension liabilities is resolved remains to be seen,

but at least the burden will be shared between the government and

public servant pension plan members.46

Despite fairly strong economic growth, Newfoundland and Labrador has

been running deficits lately as program spending has increased sharply.

The province now has the highest per capita expenditures on programs

in the country, at $13,200 per person in 2014–15. These costs have

ballooned since the recession, and the province has managed to balance

the books by using royalty revenues. (See Chart 58.) But oil production

has peaked47 (and lost value in the short term) and large federal transfers

including the Atlantic Accord and equalization have come to an end,

46 CBC News, “Pension Reform Deal Targets ‘Sustainable’ Future for Plan.”

47 The development of new basins will only partially offset the declines expected at existing fields; the sector will eventually face an inevitable decline.

Chart 57Newfoundland and Labrador’s Net Public Debt($ billions)

1980–81 82–83 84–85 86–87 88–89 90–91 92–93 94–95 96–97 98–99 00–01 02–03 04–05 06–07 08–09 10–11 12–13 14–15e

0

2

4

6

8

10

12

14

e = estimate Sources: Newfoundland and Labrador Department of Finance; Canada Department of Finance; The Conference Board of Canada.


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making it harder for the province to balance its books. expenditures will

face additional pressures due to the aging population, pressures that

include increased pension and health care needs. Therefore, the current

situation of rapidly climbing expenditures is not sustainable in the long

term, especially at a time when government revenues will be growing at

a more restrained pace.

Curb Spending, Especially in Public AdministrationWhat is driving all of this increase in expenditures? The government

has raised its spending significantly on developing infrastructure. But,

despite this increase, we saw from the benchmarking exercise that

infrastructure spending is still less than the national average. These

types of investments can have productivity enhancements if they are

targeted effectively. For these reasons, this analysis does not identify

infrastructure as priority area for reducing spending.

Chart 58Newfoundland and Labrador Depends on Oil Royalties to Balance Its Books($ billions)

0123456

789

10

ExpendituresOil royalties Revenues, excluding royalties

1980

−81

81−82

82−83

83−84

84−85

85−86

87−88

86−87

88−89

89−90

90−91

91−92

92−93

93−94

94−95

95−96

96−97

97−98

98−99

99−00

00−01

01−02

02−03

04−05

03−04

05−06

06−07

07−08

08−09

09−10

10−11

11−12

12−13

13−14

Sources: Newfoundland and Labrador Department of Finance; Canada Department of Finance; The Conference Board of Canada.




health care spending is another area that has grown tremendously in

recent years. however, Newfoundland and Labrador also has the oldest

population in Canada and aging demographics require more resources.

We compare health care spending across the provinces, adjusted for

age; that is, we adjust each province’s health care spending as though

they had had the same age/sex distribution profile as the Canadian

average. The result is that Newfoundland and Labrador’s age-adjusted

health care spending is higher than average. (See Chart 59.)

education spending is more difficult to compare due to the different

models and mix of public and private schools from province to province.

A quick proxy to compare education spending across provinces is to

look at education spending per student (full-time equivalent) in public

elementary and secondary schools. Newfoundland and Labrador’s

spending was the fastest growing in the country over the five-year period

2006–07 to 2010–11. Newfoundland and Labrador went from having the

second-lowest spending in the country in 2006–07 to the third-highest in

Newfoundland and Labrador’s education spending was the fastest growing in the country over the five-year period 2006–07 to 2010–11.

Chart 59Newfoundland and Labrador’s Health Care Spending Is High, 2012(health expenditures standardized by age and sex; $ per capita)

Que.B.C.Ont.N.B.N.S.

P.E.I.Sask.Man.N.L.Alta.

0 1,000 2,000 3,000 4,000 5,000 6,000


Sources: Canadian Institute for Health Information; The Conference Board of Canada.


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2010–11. (See Chart 60.) Since 2010–11, Newfoundland and Labrador’s

elementary and secondary education spending has continued its growth

and was 20 per cent higher in 2013–14.

The province’s public administration sector (excluding health and

education) is another area that is expanding at a rapid pace in

Newfoundland and Labrador. While the province has had one of the

highest ratios of public administration employees to residents for

decades, this already high rate experienced the fastest growth in the

country. In 2013, the province’s public sector employed over 27.4 workers

for every 1,000 residents, up from 19.6 in 1997, a figure even then the

second highest in the country after Prince edward Island. meanwhile, the

rates were mostly stable in the other provinces, with several provinces

even reducing public sector employment rates. (See Chart 61.)

Chart 60Newfoundland and Labrador Has the Fastest Growing Education Spending(total expenditures per student in public elementary and secondary schools, $)

2006−07 07−08 08−09 09−10 10−11

8

9

10

11

12

13

14

Alta. Sask. Que.N.L.

Man. N.B. N.S.

B.C.

P.E.I.Ont.





To summarize, Newfoundland and Labrador needs to fund a larger

proportion of its program spending from revenue sources other than

oil. A reduction in spending could leave more royalty revenues for other

uses such as debt reduction or savings, whereas day-to-day program

expenditures such as health and education would have more stable

sources of funding. To accomplish this, program spending should be

reduced. Provincial public administration is the most pertinent area of

focus, given that employment has risen tremendously in recent years

and is the highest in the country as a share of population. health care

spending also needs to be kept in check. education spending should

be examined to find out what is driving the recent increases. Noting

that the province has relatively low levels of infrastructure investment,

infrastructure does not need to be the focus for a reduction in spending.

Chart 61Provincial Public Administration Employment per 1,000 Residents(employment in provincial government services, excluding health and education)

1997 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

5

10

15

20

25

30

35

Alta. Sask. Que.N.L.

Man. N.B. N.S.

B.C.

P.E.I.Ont.

Note: Federal public administration is excluded from this total. Sources: Statistics Canada; The Conference Board of Canada.


www.cboc.ca/ip



Create a Sovereign Wealth FundRelying on oil revenues to pay everyday expenses is troubling for

two reasons:

1. oil price and market volatility can cause unforeseen budgetary swings

and unpredictability in revenues.

2. oil is a non-renewable resource, so the province will receive the

revenue for only a limited time. once the oil has been extracted, future

generations will not see any gains from that resource and will have to

find other ways to prosper.

Sovereign wealth funds can mitigate both of these troubling realities.

Several of Newfoundland and Labrador’s competitor regions, by setting

up these funds, have attempted to lessen volatility risks and ensure

that future generations benefit from current extraction. (See “Sovereign

Wealth Funds.”) These funds set aside a portion or the entirety of natural

resource extraction revenues in a fund that is then invested in order to

sustain itself. The region spends only the interest made on the fund,

so each generation thereafter benefits from the resource extraction

and the region is less exposed to fluctuations in resource prices. This

concept is often referred to as “hartwick’s rule,” devised in 1997 by John

m. hartwick.48 hartwick’s rule states that all non-renewable resource

revenues should be invested so that future generations can benefit from

the same quality of life made possible by the resource long after the

resource is depleted.

Sovereign Wealth Funds in Newfoundland and Labrador’s Competitor Regions

Norway’s sovereign wealth fund (called “Government Pension Fund Global”)

is one of the world’s most successful funds. The entirety of the government’s

income from resources is placed in the Fund each year and invested. Investment

interest revenues from the fund are phased into the economy at approximately

48 hartwick, “Intergenerational equity and the Investing of Rents.”




the future expected rate of return on the investments. This minimizes price

volatility and secures wealth for future generations. The fund currently holds

over $800 billion, or $176,000 for every citizen.49 each year, the fund contributes

$15 billion to the government’s books through interest income.

Texas has sovereign wealth funds, valued at $47 billion, that are funded by oil

and gas royalties; this money is used to fund primary, secondary, and university

education in the state. more recently, North Dakota set up a Legacy Fund to

which one-third of all resource revenues is automatically contributed each year.

In just three years, the fund’s value has climbed to $2 billion and no funds

(including interest) can be withdrawn until 2017.

Given the abundance of natural resources, it is somewhat of an anomaly that

sovereign wealth funds are not more common in Canada. Alberta is currently the

only province with such a fund, although British Columbia and Saskatchewan

hope to start up their own funds in the near future. Alberta’s heritage Fund was

initially created in the 1970s, with one-third of all oil revenues transferred to it

each year. In the mid-1980s, the government stopped revenue from the fund

being reinvested and also put an end to the automatic transfers of resource

royalties. As of June 2014 the fund held $17.5 billion50—only slightly more than

the $12-billion valuation in 1984, 30 years previous.

49 Norway, Royal ministry of Finance, The National Budget 2014.

50 Alberta Treasury Board and Finance, Alberta Heritage Savings Trust Fund.


www.cboc.ca/ip


• Newfoundland and Labrador has experienced unprecedented economic growth that has brought many economic, employment, and fiscal benefits.

• Despite these gains, there are several current and future areas that will present major challenges to individuals, companies, and governments.

• oil brought an economic boom that will eventually level off. Now is the time to take on the challenges so that the province remains competitive and attractive to businesses long after the oil dries up.

CHAPTER 5

Conclusion

Chapter Summary




Newfoundland and Labrador has experienced unprecedented economic, employment, and wealth growth in the last 15 years, thanks to the development of the oil extraction industry and increased metal mining activity. These developments have resulted in strong employment gains, labour productivity improvements, and significant increases in the wealth of its citizens, in companies’ profits, and in government revenues.

Several challenges on the horizon will affect competitiveness:

• oil is a finite resource and oil extraction may have already peaked.1 Its

decline will slow income gains and reduce government revenues.

• The province has the oldest population in Canada and is not attracting

enough immigrants to replace retiring workers.

• Government spending is too reliant on revenues from the oil sector.

These current and future challenges present some opportunities for

citizens, companies, and the government and there are several policies

that would help meet these challenges. This report includes the

following recommendations:

Innovation:

• strengthen links between higher-education institutions and the

private sector;

• increase competition by lowering trade barriers and through

government procurement.

1 even if additional oil extraction projects go ahead, they will only prolong the eventual decline of the industry.


www.cboc.ca/ip



Investment:

• create an equitable and efficient tax system for capital;

• increase investment in public infrastructure.

human capital:

• boost immigration and corresponding recognition of credentials;

• increase education levels and match skills training with labour

force needs;

• retain and engage older workers and under-represented groups.

Fiscal policies:

• reduce government programs’ reliance on funding coming from

oil revenues;

• keep net debt in check by reducing spending, especially in

public administration;

• create a sovereign wealth fund so future programming can rely more on

interest and less on oil prices.

It is not only the governments that have to take action. Citizens will

need to upgrade their skills and education to reap the full benefits of

this prosperous time. Companies will need to play a role by investing

both in the training of new employees and in the capital and machinery

to increase productivity and competitiveness. It is the government’s

responsibility to prioritize spending, reduce debt, and create a

competitive and efficient taxation environment to attract new business

and ensure all future generations benefit from the oil wealth. Together,

with the support of the government, citizens and companies can meet

the challenges ahead and prosper for generations to come. Action

should be taken soon so that businesses and citizens will be left in a

competitive and prosperous environment when the resources extraction

slows for good.


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The first step in the jurisdiction selection process was to identify direct

competitors. Petroleum and iron ore comprise more than 80 per cent

of the value of all Newfoundland and Labrador’s merchandise exports.

(The exports of other products such as other metals, pulp and paper,

and seafood were taken into account once the list was first determined,

based on the two top export products.) The export destinations were

identified and a list of other jurisdictions that export the same mix of

goods to the same destinations was compiled.

For example, Pennsylvania is one of the top destinations for

Newfoundland and Labrador’s oil. Therefore, a list of the top 10

Pennsylvanian import sources of oil was created. Canada, Norway,

and eight African and middle eastern countries comprised the list.

So Norway became a contender for the final list at this stage in the

selection process.

A similar approach was used to identify competitor U.S. states. Countries

were identified to which Newfoundland and Labrador exports crude

oil, petroleum refined products, and iron ore. Next, the U.S. states

from which these countries also import those same products were

identified. This indicated the U.S. states that are direct competitors

to Newfoundland and Labrador. To identify competitor provinces, we

identified other provinces that export a similar mix of goods to the same

states and countries.

APPENDIX B

Jurisdiction Selection Methodology



Appendix B | The Conference Board of Canada

From this exercise, a list of competitor countries, states, and provinces

was drawn up and then the list was pared down to include only the

jurisdictions appearing most frequently in the competitor lists. For

example, Norway exports oil to seven of the top eight U.S. states to

which Newfoundland and Labrador also exports oil. In comparison, the

Netherlands exports oil to only two of Newfoundland and Labrador’s top

eight U.S. state destinations. Therefore, the Netherlands was cut from

the list at this stage.

Next, this short list of competing jurisdictions was whittled down again,

based on the similarity of the competitor’s challenges and business

operating environment to the challenges faced by Newfoundland and

Labrador. This was determined by a number of factors, including the

size of the population and economy, the proportion of the population

considered rural, the political operating environment, and the industrial

structure of the jurisdiction. This step ruled out many developing

nations (for example, Brazil and Nigeria) and many oil-producing middle

eastern countries (for example, Saudi Arabia and Iraq). This left a list of

14 contending jurisdictions (in addition to Newfoundland and Labrador)

for the benchmarking analysis.

Finally, the authors and the funding client (the Newfoundland and

Labrador employers’ Council) cut the list from 14 to 9 jurisdictions, based

on knowledge of the jurisdictions and qualitative weighting of some

determining factors, including population aging and urbanization.

one of the metrics used to establish a list of competitor jurisdictions is

the aging population of Newfoundland and Labrador. An older population

will require more government services and programs. The population

over the age of 65 in Newfoundland and Labrador has increased rapidly

over the past 10 years and currently accounts for 18 per cent of the

provincial population. The aging of Canada’s population accelerated over

the same period, but at a slower pace. Currently, 16 per cent of Canada’s

population is aged 65 or older. only Nova Scotia and New Brunswick

have experienced more rapid increases in population aging over the

same time period. The Conference Board forecasts that the proportion of

Newfoundland and Labrador’s elderly population will account for 30 per


www.cboc.ca/ip



cent of the province’s total by 2030. This will be the highest proportion

in the country and will present a notable challenge for competitiveness.

In comparison, Canada’s elderly population as a whole will account for

23 per cent of the total by 2030.

A second metric, the level of urbanization—or lack thereof—of the

population, is also a notable element of Newfoundland and Labrador’s

operating environment. only 59 per cent of the province’s population

lives in urban areas, which is a much lower percentage than the national

average of 80 per cent. It was difficult to find jurisdictions with as large a

rural population as Newfoundland and Labrador, but this metric helped

to identify North Dakota as a strong contender since it has a similar level

of urbanization.


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